A few of weeks ago, I pointed out that betting on last year’s winning shares may not always be the best investment strategy.
Readers will therefore be forgiven for stating that I am directly contradicting myself this week.
I would like to focus on the “not always” for a bit, simply because if quality companies like Naspers*, Capitec, Clicks and several others have taught us anything over the past ten years, it is that you shouldn’t jump in front of an oncoming train.
It’s a lot like not giving road racing cyclist Annemiek van Vleuten the opportunity to win the recent UCI Road World Championships, after she managed to break away from the peloton 105km before the finish line. It’s nearly impossible to hold onto that lead, but the fact that Van Vleuten is a top-quality cyclist made all the difference. She won the race and was crowned as the 2019 World Champion.
During this race, I learnt two valuable lessons: Firstly, you should never underestimate quality as a factor. Secondly, if there is momentum behind something – whether it’s in the world of sport or investments – be very careful in going against it.
Van Vleuten, for example, didn’t only win the recent World Championships. She also won a number of other big races in 2019, including the prestigious Giro d'Italia Femminile. She entered the World Championships with pre-existing momentum and managed to keep it up.
By applying the same principles to investments, I worked through data on the FTSE/JSE All Share Index to determine if there are quality shares that experienced strong momentum recently. In no particular order, Pieter-Jan van Niekerk, equity analyst at PSG Wealth Old Oak, managed to identify three such shares:
In a recent trading statement, Afrimat stated that headline earnings per share for the interim period ending 31 August 2019 will surge by between 91% and 96% compared to the prior comparative period. Despite the challenging conditions in the construction sector, Afrimat has consistently been one of the JSE’s best performers. Management expects the growth from its iron ore operations to continue to perform well, as the business will now be in a position to sell its full monthly production.
African Rainbow Minerals
Driven by a solid recovery in the resource sector, African Rainbow Minerals has delivered a total annualised return of 26.69% over the past three years. The group is highly cash generative, with most of its mining operations positioned at the lower end of the global cost curve. Unlike its peers, the company has managed to consistently pay dividends to shareholders. The future price action of the share will be dependent on the underlying commodities prices the group is exposed to, as well as the rand.
Clicks has been doing exceptionally well over a number of years, driven by market-share growth and a competitive product offering. The company recently indicated that it expects headline earnings to increase by more than 15% in the 2019 financial year. This is an exceptional performance, taking into account the unfavourable trading environment. Over the past ten years, Clicks has delivered an average return on equity of more than 49%. As at the time of writing, the share has gained 32% year-to-date.
Clearly, there is an exception to this rule, but it remains of the utmost importance that you always do your homework properly when it comes to selecting shares, especially when dealing with last year’s winners.
Momentum is a double-edged sword. When the market factors work in your favour, a winning combination can prove hard to beat. On the other hand, momentum can push valuations to a level where, despite everything that counts in their favour, the shares in question become relatively expensive.
As always in investing, take care before you decide to make the leap – and if you do leap, make sure you are jumping onto the train, and not in front of it.
*finweek is a publication of Media24, a subsidiary of Naspers.Schalk Louw is a portfolio manager at PSG Wealth.