Some older and wiser investors say that one should always hold shares in banks, casinos, and companies that produce alcoholic beverages. These are companies that come rain or shine will always make money.
This article is about two alcoholic drinks producers, one onshore and the other one offshore.
I recently found this article (Heineken considers takeover of brewer Distell – Moneyweb) published on Moneyweb on May 18.
In the article, it states that Heineken the second-biggest beer producer in the world is “in talks” about taking over African wine and spirits maker Distell. Distell, as the article reports, is “considering its options”.
Distell is one of those companies all South Africans should be aware of, as it produces brands such as Klipdrift Brandy, Amarula Cream, Savanna cider and Bain’s Cape Mountain Whiskey.
The question therefore is, is buying Distell a good deal for Heineken?
We at Global & Local Asset Management use the “Avoid the Human Factor” strategy to manage our portfolios. The strategy focuses on managing portfolios like an actuary and not a portfolio manager.
The strategy comprises of developing probabilities that indicate the chance of a listed company NOT being able to achieve the growth implied by its current share price.
If we were to view Distell’s Human Factor Score, we would see that our New York associates New Age Alpha, who have developed the Human Factor Score and publish these scores on their website for free, have provided that Distell has a 31.4% probability of NOT being able to deliver the growth implied in its share price.
Hence, if we turn this percentage around, then we can understand that Distell has a 69.6% chance of actually being able to deliver the growth implied by its current share price.
The response to the question posed above would therefore be that purely based on the Human-Factor Score Distell would be a good deal for Heineken, at its current Human-Factor Score.
We at Global & Local Asset Management do realise that the world of mergers and acquisitions is simply not this easy to navigate through, especially where a listed company is involved, there are of course many other factors to consider in an acquisition of this magnitude.
Neither are we advocating that Distell is a good share for individual investors to buy now or even at a later stage as this article is not about dispensing stock market advice.
What we are illustrating here is how share prices are affected by human behaviour.
As this article in Moneyweb reports, straight after Distell confirmed an earlier report on Bloomberg News that Heineken had approached Distell about this proposed acquisition, the Distell share price jumped as much as 10%, hitting an “intraday record”.
This jump in share price is a good example of how human behaviour has affected Distell’s share price.
The higher the level of human behaviour inherent in the share price, the higher the level of vague and ambiguous information existing in the share price, and the higher the Human Factor Score. The higher the Human Factor Score, the bigger the risk present when purchasing that share.
Distell currently is within the 30 companies listed on the JSE with the lowest Human Factor Scores. Thus again, based purely on the Human Factor Score, the acquisition of Distell by Heineken could be a good deal for Heineken. Although it is possible that the Human Factor Score for Distell may change in the next few days after this news has been taken into consideration.
Stock prices are affected by human behaviour. This creates a risk that investors are not fully aware of, that erodes alpha and that they are not compensated for taking, a risk we call the Human Factor.
Using a probability-based approach to stock selection, we help investors identify and avoid this risk.
The Human Factor Score measures the risk of human behaviour inherent in any company’s share price, the probability takes into account whether the company has provided the growth implied in its share price in the past.
The approach taken by Global & Local Asset Management is not to manage portfolios like a portfolio manager but rather to adopt actuarial techniques to asset management.
If you would like to know more about how the Human-Factor score tool works and how we “Avoid the Losers”, then please contact us at Global & Local Asset Management.
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Global & Local Asset Management (Pty) Ltd. Reg. Number: 2018/580284/07
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