marketplace markets
GLOBAL ECONOMY
@finweek finweek finweekmagazine finweek^ 19 March 2020^29By Maarten Mittneri
n a force majeure event, such as the present
coronavirus epidemic spreading worldwide, blind selling
or buying in the market becomes the norm. But under
more normal circumstances, when to buy and when
to sell equities are important considerations based on
calculated assessments.
There is a saying that a share can climb much higher
than hoped. Or linger at the bottom far longer than feared.
A selling spree represents a correction, with buying
opportunities. Some shares are usually overvalued.
But many are also undervalued. Local property and
retail shares could have been considered overvalued
before the present dip. But now they almost certainly
are in undervalued territory.
Platinum and gold shares have risen to overvalued
levels, delivering growth of 200% over the past year
in some respects, benefitting from higher commodity
prices and a weaker rand. The same for the major global
tech stocks, growing on average 50% from a year
ago before the slump, just when it was thought that a
correction then could have been imminent.
Inherent value is the real value of a company,
usually linked to its net asset value. But companies
rarely trade at these levels. Therefore, the price at
which to buy or exit a share is fraught with difficulty
and danger. But it is immensely important for future
returns.
The safest rule is to reduce exposure to overvalued
shares and to increase investments in undervalued
counters. But following this approach has also
proven to not be a long-lasting solution in
ensuring optimal returns, when exiting too early
or sticking with undervalued shares for too long.
If an average investor sells under the present
trading conditions, it could be a worse decision
than buying at the top. Sitting tight has more
benefits than exiting at the bottom, as Warren
Buffett has proved. And immense wealth has been
made from junk bonds by others.
Sibanye-Stillwater, with shares hitting R50 recently,
is clearly overvalued. But it can still go higher. Sasol,
losing four-fifths of its market value in a year, is obviously
undervalued, but could go even lower. Is there more
upside potential in Sibanye-Stillwater or in Sasol?
Difficult to say. But fundamental factors, such as high
debt and lower oil prices, could hold Sasol back over the
short term more than Sibanye-Stillwater, benefitting from
a surging platinum and gold price.
Often a winner is not spotted.
Capitec has surged way above its real value, now
trading at a price-to-earnings (P/E) ratio of around 20Is a new Gilded Age upon us?
Ascertaining whether a stock will rise further or remain under pressure for longer is a tricky exercise. There are
those stocks, however, running wildly on the back of stellar growth.and a share price of over R1 000. Very few mainstream
general equity funds had any exposure to Capitec through
the years, selling out in favour of the mainstream banks.
But a recovery at average deflated P/E levels of below
10 for the traditional big four local banks – FirstRand,
Standard Bank, Absa or Nedbank – remains elusive.
Internally, debt levels and customer growth as well as
prudent takeovers and development spending drive the
value of a company. Externally, “barriers to entry” to the
market is a handy indicator of likely sustainable growth
as new entrants to the same markets are unlikely to
present a threat.
Capitec’s growth was largely on the back of the
subdued performances of the big four, as well as
the likelihood of lesser competition from any new
entrant into the sector due to huge start-up costs. The
authorities also made it clear that mergers of existing
banks will not happen, thereby boosting organic
growth at Capitec.
Globally, the large, trillion-dollar market cap tech
giants – Alphabet, Apple, Amazon and Microsoft – have
all delivered strong returns by operating in “captive
markets” with little competition and spinning out large
amounts of cash. Riding on the crest of the fourth
industrial revolution, there are apparently still many
opportunities to be harnessed in the rising digital world.
Already reminiscent of the Gilded Age and the robber
barons of the early 1900s in the US, these companies
are forecast to double growth in the next decade,
further crowding out established players.
It seems unlikely that history will repeat
itself as then, when the wings of the robber
barons were clipped by the Progressive Era
administration of president Theodore Roosevelt.
This led to the eventual growth of the American
middle class, boosting equity markets. Now the
prospects for the middle and lower-middle classes
are under threat due to the price and productivity
dominance of the tech giants, with average income
growth stagnant over the past decade in the US. And
inequality rising exponentially.
Barring a Bernie Sanders presidency, big tech stocks
are unlikely to lose their allure. Cash flow levels remain
positive. Proposed digital taxation and steps from the
authorities to curb excessive market dominance have
been notoriously ineffective up to now.
But do not discard the potential of undervalued
shares. The rewards could be greater. Ask gold and
platinum investors. ■
[email protected]
Pho Maarten Mittner is a freelance financial journalist and a markets expert.
to:^
Shu
tter
sto
ck
Do not discard
the potential of
undervalued shares.
The rewards could
be greater. Ask
gold and platinum
investors.