Tiger Woods must stand out as one of the biggest comebacks of all time. Until quite recently, most people felt that he used to be one of the greatest golfers ever, but that his retirement was due any moment.
His body has endured many surgeries over the years, and the BBC reports that he spent 1 876 days without a single win. At one point, he was ranked 1 199th in the world. But his willpower and determination – a mark of all quality sportsmen and women – surprised everyone when he won the US Masters in April.
It’s human nature to give up on something if it “doesn’t work anymore”. Take our local stock market – it’s no surprise that in the past few years, several things just weren’t working.
When we look at shares with specific characteristics (or factors) that ‘went under the knife’, quality shares seem to stand out. Quality shares are valued according to strong return on equity (ROE) and the lowest possible enterprise value to free cash flow ratio.
The Satrix Quality South Africa exchange-traded fund (ETF) dropped by more than 3% over the year to 8 September 2019, while the same management company’s Alsi index fund barely managed to deliver positive growth over the same period. Meanwhile, the MSCI World Quality Index was one of the best investment choices as it managed to outperform the MSCI All Country World Index quite comfortably.
I’m not calling local quality shares the ‘Tiger Woods comeback’ of the SA stock market. But I decided to dig a little deeper to look for possible opportunities. With the assistance of Pieter-Jan van Niekerk, equity analyst at PSG Wealth Old Oak, I managed to find some quality shares that may just be restored to their former glory.
Mr Price said earlier this year that it was anticipating a challenging first half of the 2020 financial year, but expected an improvement in the second half. The group has delivered an average ROE of 43.7% since 2009, well above the industry mean of 25%, according to data provided by Thomson Reuters. Relative to peers, the group has low debt levels and is a highly cash-generative business. Mr Price is well-positioned to benefit from a recovery in the local economy.
After the confirmed outbreak of listeriosis in December 2017, Tiger Brands lost nearly half of its market capitalisation. Higher input costs and a challenging trading environment has put further pressure on operating margins. The company’s debt levels are below the long-term and industry average. Should future earnings revert back to historical levels, Tiger Brands could offer value to long-term investors.
Standard Bank has managed to grow earnings by 9.72% and its dividend by 12.72% year-on-year over the past five years. The group is likely to see most of its growth come from regions outside of SA, such as East and West Africa. About 38% of the group’s earnings are non-South African, which provides greater diversification and exposure to faster-growing economies in the rest of Africa.
Schalk Louw is a portfolio manager at PSG Wealth.