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JSE Direct with Simon Brown

Weekly podcast hosted by Simon Brown covering the JSE and listed companies.
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Now displaying: October, 2018
Oct 31, 2018

This JSE Direct is proudly brought to you by IG, the specialists in CFD trading and a registered financial services provider.

Simon Shares

  • Calgro M3* (JSE code: CGR) results a horror. Sure some is due to the new IFRS, but a lot else hurting them right now and I am selling my last remaining shares having sold the bulk in December 2015 at over 2000c.
  • Santova* (JSE code: SNV) results show stronger Rand hurting, but also very tough trading condition locally. I am not selling here.
  • Horror update from Shoprite* (JSE code: SHP). Some due to negative inflation on products, they say "11,607 items in September remaining cheaper than they were a year ago". That hurts as costs rising. But they also had issues in their Gauteng distribution centre that made for stock issues in stores.
  • Famous Brands* (JSE code: FBR) are a two part story. GBK in the UK remains an absolute mess and they're trying to get reductions on leases, an I assume they tried to sell it and failed. Locally they doing alright considering very tough trading conditions. But that UK deal remains a disaster.
  • Naspers (JSE code NPN) closed Tuesday at R2,370 and is now trading Wednesday up almost 8% at R2,555.00. This is in part thanks to Trump saying maybe they could be friends with China and that boosted Tencent. Also MSCI deciding to not make any major changes to index weighting’s with the plan being to reduce weight of stocks with low voting shares, such as Naspers share we trade on the JSE.
  • Vivo (JSE code: VVO) trading update confirms that the Engen deal is done, albeit without the Democratic Republic of Congo assets. This expands them into eight new countries and adds 225 service stations. But Morocco remains an issue as we await the Kings announcement on regulating the fuel price. That are seeing margin pressure here and it is the biggest market for the company - so it's important and while I like the business I want this sorted first.
  • IG CFD conversations; exposure and leverage explained 
  • Understanding the NewFunds Momentum Equity ETF*
  • OUTStanding money with Outvest: What you get when you save
  • Upcoming events

* I hold ungeared positions.


JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.

Oct 24, 2018

This JSE Direct is proudly brought to you by IG, the specialists in CFD trading and a registered financial services provider.

Simon Shares

  • More delistings. I write about this for next weeks FinWeek. But it is expected and does indicate we're at (or near) a bottom with quality at really cheap valuations.
  • Top40 just holding above 45,000 making us literally a few hundred points away from an official bear market locally.
  • El Niño likelihood now at 70%, bad for food producers and consumers. I have found a website that tracks the likelihood, it Australian but weather don't care for borders
  • Saudi Arabia oil chief says OPEC in ‘produce as much as you can’ mode and Brent drops to $76 after peaking at $84 recently. Bad news for Sasol* (JSE code: SOL) but coupled with ZAR at R14.40 potentially good news for consumers.
  • Long4Life* (JSE code: L4L) results, they have cash and cash equivalents of R1.05bn, about 115c a share. Still mostly the old Holdsport business at 60% of revenue and 64% trading profit.
  • Nu-World (JSE code: NWL) results show HEPS +11.5% and dividend +11.9%. Really good results in a very tough economy (helped by a swing in currency translation gains of some R46million). One concern is a bank overdraft of R133million, up from R59million and I always ask why an overdraft and not a formal loan structure? The stock is on a PE of under 5x and a dividend yield of over 6%, staggeringly cheap, but this has always been the case with this stock and the question is what will trigger a rerating higher?
  • MTBPS
    • R27.4bn revenue shortfall for 2018, and a R85bn shortfall in revenue over the next three years.
    • Treasury revised down its growth projection for 2018 from 1.5% to 0.7%, rising to 2.3% in 2021.
    • Debt as a percentage of GDP will continue rising, reaching 59% at the end of 2022, from 50.7% in 2016/17.
    • Three items – white bread flour, cake flour and sanitary pads will be zero VAT rated from next year.
    • "Demolish the walls between public and private sectors." Privatisation?
  • IG CFD conversations
  • Investing in listed property
  • Upcoming events

* I hold ungeared positions.


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Correlation is not causation

Correlation is when two things are seemingly linked but more important is causation when they really are linked and one leads to another.

As humans we live by the mantra of 'what causes what' and this remains very important to our species, but we get it wrong far to often. Some are simple and correct, increasing earnings from a company will in time result in a higher share price. But in the short term all sorts of issues are driving price that most often have nothing to do with the state of the company underlying that share price. Hence stocks get cheap and expensive creating opportunity for investors.

But we need to be very careful of linking events that while they seem linked are not linked.

A great website Spurious Correlations has many correlations that have no bearing on each other. One example is “people who drowned after falling out of a fishing boat” correlates 95.24% with “marriage rates in Kentucky”. Now nobody really believes that in this example one causes the other.

We're constantly being bombarded with data and trying to figure out what drives that data and what impact it'll have. Part of the problem here is the 24 hour instant news agenda. Markets move and news needs a reason beyond buyers vs. sellers. So we find a reason, one that seems to fit but may very likely not be true.

The point here is two fold;

  • Understand our desire as humans to link one event to another (think of the things we 'see' in the clouds). More often then not the links that we take for granted are weak at best and more likely Spurious.
  • Be very skeptical about supposedly causation. Interrogate the logic and confirm it for yourself, don't just trust what seems right.

JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

Oct 10, 2018

This JSE Direct is proudly brought to you by IG, the specialists in CFD trading and a registered financial services provider.

Simon Shares

  • NO show next week (18 Oct 18), I am holidaying.
  • Remember the chart of the Top40 I posted a few weeks back, showing the trading range? We broken the range again, but this time to the downside and we're not almost 15% off the November 2015 highs. Not the end of the world, yet. We do however need to bounce back into that range ASAP.

 


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Too small to matter

Portfolio construction is way more than just deciding which stocks to buy or sell. It's also valuations, about asset classes and position sizes.

The first question is how much of my portfolio should be passive, how much active (your own DIY investing or an active manager) and how much for trading? I always state that passive should be a minimum of 50%, this protects us from the follies of trying to beat the market either ourselves or with a supposed expert. The more we put towards passive the more certainty that we will at least match market return. Now sure we want to get rich quickly so we want to beat the market, trounce it. But the truth is that this is hard with the professional active industry seeing only some 15% of active managers beating our market.

Once we know how much (if any) we're putting into active we need to decide how this will work?

  • An active fund manger or DIY or combination of both?
  • How will we select the active manager or fund and how will we measure (and potentially fire) them?
  • What about trading? Geared, ungeared? Equity or indices or FX?

Then we need to start deciding what shares we want to own. This process is slow, not only in the selection, but then also in the waiting for the prices that we want to buy at.

What is also very important here is how much of the share we should be buying. Any share needs to have a chunky enough size to be material but not so large that it could be catastrophic. I hold 10-12 individual shares within the 40% of my portfolio that is set side for my own active management making each share around 4% of the overall portfolio. With growth some shares may in time become more chunky and then I stop buying and in time may even have to sell down the position to avoid being over exposed.

I also need to monitor what's in my passive investments. For example Naspers (JSE code: NPN) is very large in Top40 ETF (except the equal weight ETF from CoreShares) so adding some active Naspers makes you likely over exposed to the stock.

But there is another issue, position sizes so small as to be meaningless. I often see a stock sitting at under 1% of a portfolio. Now even if this stock doubles in value it'll only add 1% to the overall portfolio.

Yet it is taking as much effort to select, research, read results, valuing and transact as a full size position. So same work but for less reward.

These small positions are sometimes dogs that have collapsed and investor is unwilling to sell in the misguided belief that one day it will return to its glory (spoiler alert - it won't, Sell the dogs).

But at other times they because of a lack of conviction. You want to own the stock, it seems hot and everybody is talking about it and you're afraid of missing out but you're also afraid of the risks. So you take a small insignificant stake to serve both fears. But investing is about conviction. Either like a stock and give it full weighting or don't buy it. No half measures.

Another potential reason for the small fry is legacy. Every portfolio starts small and when starting out we often buy stocks that in years to come we'll look back and wonder why we ever bought them. Yet there they sit, small and insignificant.

In all cases small fry must be dealt with. Either increase the position to a meaningful size (waiting for the right valuations) or sell it. Don't keep a stock that has no significance in your portfolio.


JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.

Oct 3, 2018

Simon Shares

This JSE Direct is proudly brought to you by IG, the specialists in CFD trading and a registered financial services provider.

Small cap pain

Small caps, we love them because when they get going - they go. Really go. Ten baggers are a dime a dozen when things are hot and markets are running.

But right now - not so much (see chart below) and here's why.


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Firstly small caps are typically very SA Inc focused due to their smallness. Now this is not 100% true as there are stocks with offshore exposure, but generally the statement holds. That being said the economy is struggling, recession, VAT increases, petrol prices etc. are all putting the kosh on the economy and hence SA Inc and smaller stocks.

The bad news is that I don't expect this to change any time soon. Make no mistake there are a bunch of high quality small caps at very attractive valuations. Companies that are not going to go bust and in many cases continue to make profits even in these tough times. The problem is that the same can be said of the large Top40 stocks. Sure some dogs in this index, but equally some really great companies at attractive valuations. Forward PE on the Top40 is 13x, cheapest I have seen it in a decade. Yet the selling continues.

Further before small caps start to run I'd expect the larger Top40 stocks to run hard, become expensive and then investors start hunting down the list and buying the small cap stocks. So with the large stocks not running we have little chance that small caps will start to run.

I hold a few small (and mid) cap stocks, and I continue to hold but I am not running in and buying, even at these levels. I have enough and I don't see them recovering any time soon.

[caption id="attachment_8634" align="aligncenter" width="1080"]MidCap weekly close 03Oct18 MidCap weekly close 03Oct18[/caption]


JSE – The JSE is a registered trademark of the JSE Limited.

JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


 

 

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