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Photos:^ Shutterstock^I^Archivefinweek 15 August 2019 39s
eeing the price of a prized share drop by
between 80% and 90% over the commonly
advised medium term will lead to the inevitable
question: Why didn’t I see it coming?
Various South African “solid stocks” went through
such drops over the past couple of years – leaving
heavily invested retirement funds and retail investors
alike in a world of pain. Not to mention those listed
companies that succumbed to corporate governance
issues (PR-talk for unethical behaviour and sometimes
outright fraud). The latter is far harder to spot.How do you avoid the future losers?
“At its most basic level share prices tank when there
is a significant difference between expectations and
reality,” says Jean Pierre Verster, founder and CEO of
Protea Capital Management. “Especially when investors
realise their expectations are not aligned with reality.
Therefore, their expectations need to adjust. When
their expectations suddenly need to adjust downward
because they realise that reality is not as optimistic as
they thought, it leads to a share price that tanks.”
Expectations were realigned in various local
companies over the past couple of years. Fertiliser-
maker Omnia’s share price dropped by more than
85% over the past five years through 30 July. Aspen
Pharmacare slumped by 69% over the same period.
Information technology company EOH, with sales of
over R16bn in its last fiscal year, plummeted more than
80% over the past five years – with almost half of the
decline since the beginning of this year.
Sugar and starch producer Tongaat Hulett fell 91% over
the past five years and had trade in its shares suspended
on 10 June.
Then, of course, there’s Steinhoff. It destroyed 98% of
shareholders’ value due to the misstatement of financial
performances and asset values over many years.
These companies are well-known and well-
researched corporates.
Avoiding the pitfall of a plummeting share price is a
difficult art, with the entire investment management
industry as its practitioners.Fundamentals
One way to spot a share price heading for choppy
waters is by looking at the company’s so-called financial
fundamentals.
“When looking at fundamentals when investing, one
must remember that investing is a holistic endeavour,”
says Verster. “There aren’t just one or two or three
indicators that will give you the full picture of what is
implied in share prices.”
Share prices tend to decline when a company
announces worse-than-expected results, including sales
and net profit data. This was the case when Aspen toldJean Pierre Verster
Founder and CEO of Protea
Capital Management