The lockdown has given investors the opportunity to buy some great companies at great prices, writes Simon Brown.
When the markets collapsed back in March, and then started to stage their recovery, all the talk was centred around what shape that recovery would take. Would it be V-shaped (a crazy idea at the time, but one which has pretty much held true for overall indices)?
Many said it would be W-shaped and we would see a second sell-off – this never happened. Another option was an L-shaped recovery, but that was never on the cards as markets rallied fast off their lows. A last offering was a proposed U-shaped recovery.
The shape of the recovery, if we dig deeper into the market’s performance, is a K-shaped one. We have an upper leg that is booming. In the US, it’s the large tech stocks and locally, it’s miners. The lower leg is pretty much everything else, with some sectors, such as leisure, right at the bottom. Locally, the banks are also really holding on to that lower leg.
Back when we were in hard lockdown my investment approach was simple.
I stopped buying any shares and only bought my regular exchange-traded funds (ETFs) every month. I simply didn’t know how the pandemic would play out and I felt erring on the side of caution was the best approach.
I have, in the last few months, been buying individual stocks again, focusing on miners and stockbrokers. Two easy winners from the lockdown boom in online trading and investing, and of course the commodity price moves.
But now we’re at six months after the collapse, the hard lockdown is behind us and very unlikely to be re-introduced.
We need to start looking at those stocks in the lower leg of the K-shaped recovery, as there is value there. What we are also seeing is company financial results that include the level-4 and level-5 lockdown stages. So we are able to get an idea of how companies coped, although this is behind them.
So, what am I looking for? The usual and the simple. I want to own the best companies in sectors that have underlying fundamental growth prospects. What the lockdown gave us is an opportunity now to buy some great companies at great prices.
What we’re also seeing from these ‘lockdown financial results’, is the quality of management. AVI’s results again showed evidence of a top management team, while Shoprite’s* results confirmed my belief that it’s best food retail management team in the world, never mind South Africa.
What I’m not doing is buying beaten down stocks with lots of debt and a hope that things will get better. Sure, it will get better (from a pandemic perspective) but they will never beat the better-managed companies. I’m also still extremely cautious on both listed property and leisure.
Property is cheap; unbelievably cheap by any metric. But this lockdown is changing trends and I’m not sure how it will play out in the long term. The exception is property logistics stocks such as Equites. This is because we’re doing more online shopping and thus logistics warehousing becomes ever more important.
Leisure stocks are the cheapest on the market and for a good reason. There is huge pent-up demand, but SA’s borders remain closed and local consumers may be spending right now, but the economy is in bad shape and so too are consumers.
The next 12 to 18 months will remain tough. But, as I said earlier, the hard lockdowns of April and May are not likely to be repeated and we’re seeing some impressive results considering that lockdown. Look for quality companies with great management teams who are coming out of this pandemic with strong potential and stock up on this sale in shares.
Lastly, the next year or two will be rocky, but remember we’re long-term investors buying quality at great prices.
*The writer owns shares in Shoprite.