Recently, in a tweet, Delphine Govender from Perpetua referred to many of our locally listed stocks as being in “earnings ICU”.
She is correct. Results coming out for the JSE-listed stocks are bleak.
Aspen, for example, now states that its core businesses, comprising some three-quarters of revenue, will see organic growth of only 1% to 4%.
And Shoprite* saw headline earnings per share (HEPS) drop for the first time in over a decade.
This should not come as any surprise – 2018 has been a tough year for consumers, with a VAT increase, fuel prices continually rising and a technical recession to boot.
All of this comes off the back of hefty personal tax increases in previous years.
But this is also an opportunity for investors.
The JSE is having a sale and we’re invited to partake. The question is: which stocks will be discharged from ICU and which won’t?
All of this also plays into my column in the last issue (“What goes up, must come down”, 27 September) about the impending bear.
Remember, I said we should not worry about the bear. It will come and we will survive.
Importantly, as with all sales, we need to be disciplined.
First of all, we need to recognise what is happening.
Typically, we tend to love a stock that is flying, but we don’t own it because it always seemed expensive. So we never got on board.
We tell ourselves that as soon as we see a dip in price, we’ll start buying. Then it retraces and we get cold feet. This is not a baseless fear, as demonstrated by both MTN and Aspen.
The pharmaceuticals maker hit R440, but is now under R180. MTN, once R260, now trades below R80.
However, these two examples (and many others) are not a fair reflection. Both these stocks are in a changing environment.
Aspen is maturing to a largely ex-growth company, and MTN is in an industry with falling prices and regulatory issues (often of its own making).
What I want to talk about here are bellwether stable and boring stocks that chug along – in the olden days we’d have called them blue chips.
Sure, they have hit a pothole in the road, but it’s just a puncture, not a write-off.
The stocks I am looking for are consumer staples and discretionary. They are non-cyclical, with solid barriers to entry.
One of the examples mentioned above is Shoprite (and other food retailers, but Shoprite is head-and-shoulders above the rest and my preferred option).
We can also add Bidvest, Growthpoint, Hyprop, Famous Brands* (still suffering indigestion from its UK burger outing) and others.
You’ll have your own list and it’s time to start perfecting it.
In all of these stocks an improving economy will see their profits start to increase as the consumer starts spending again.
The issue is whether the economy will improve. Certainly it will. It may take time, maybe a lot of time.
But if your view is that the local economy will never recover and that our future will follow the path of Zimbabwe, Argentina or Venezuela, then you should be buying a plane ticket rather than local stocks.
The fact that we don’t know when things will get better gives us time – we don’t need to rush in. We can place some cheeky bids at lower prices for stocks we like.
We can slowly build positions (or add to them) using any weakness to buy more. There is no rush at this sale.
But also remember that no sale lasts forever, so don’t try and figure out the absolute bottom.
Decide what stocks you like – and at what prices – and patiently use this weakness to build a high-quality portfolio at great prices.
*The writer owns shares in Shoprite and Famous Brands.
This article originally appeared in the 11 October edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.