Top market watchers share their JSE stock picks (Part II)

Thoughts from Piet Viljoen, Simon Brown, Anthony Clark and others …
JSE CEO Leila Fourie says more of these live ‘stock picks’ sessions can be expected. Image: Moneyweb

Last week, Moneyweb highlighted the top three picks from the six money managers who participated in the first of two live YouTube sessions hosted by the JSE this month.

David Shapiro of Sasfin had openly challenged JSE CEO Leila Fourie to host a webinar with stock picks from those who follow the market. The first session was held on August 3 and the second just over a week later on August 11.

While there were no overlaps from the six fund managers who were part of the first session, three shares Afrimat, Combined Motor Holdings (CMH) and City Lodge were picked by two participants in the second session. A further participant picked Sibanye-Stillwater which had been picked by a fund manager in the session a week prior.

Each participant had under 10 minutes to provide their three top stock picks, with reasoning for each.

Highlights from session two

Anthony Clark, independent analyst at SmallTalkDaily Research

Clark picked three very different stocks. The first, a small cap, is Combined Motor Holdings, where the “owner, Jebb McIntosh, is still CEO … he remains majority shareholder”. This business “cut back sharply when Covid-19 hit and earnings and revenue were only down modestly” despite lockdown. “Half of the market value sits in cash, and it has been trading at a large discount for quite some time.” Clark values it at about R35 a share.

The next, a “slightly bigger cap” is “blue chip” Afrimat which Clark has been covering since its listing in 2006. It has consistently “bought distressed assets on the cheap, moved into industrial minerals, and latterly bulk commodities [iron ore and coal] … It is run and owned by extremely competent managers who know how to allocate capital” and is busy transforming into a diversified mining-related company.

Clark says he is “well-known for highlighting special situations” and one has arisen at York Timber.

It bought Global Forestry Projects in 2007 for R1.7 billion, took on too much debt, and the share price has done nothing for 12 years, until two weeks ago. “An activist shareholder has taken advantage of the unfortunate passing of the CEO” and the share price has risen sharply. Clark says there is a “lot more work to do to unlock value and capital,” but this once again proves the “JSE continues to have value in certain small caps if you know where to look for them”.

Simon Brown, director and founder of JustOneLap

Brown, who is also a presenter on Moneyweb Radio, has Murray & Roberts as his first pick. He admits he “typically [doesn’t] like construction stocks, but Murray & Roberts is no longer in this space – it has moved into oil and gas and moved into mining”. Also, says Brown, it kept its infrastructure division in SA which gives it optionality, especially with the recent gazetting of the liberalisation of the electricity generation market.

Sibanye-Stillwater is Brown’s pick of the platinum group metals (PGM) prices. He sees “stabilising” PGM “prices over the next few years”. Why Stillwater? He admits he likes the palladium business in North America and while it has exposure to “a little bit of gold” that doesn’t interest him “in the least”. It is on a “forward PE ratio of about four” and is expected to pay “chunky dividends” in the near-term.

Brown says the “stock he gets asked most often about” is Purple Group.

Easy Equities is the part of the business that’s the most enticing. It has one million signed-up accounts, with over 520 000 of these being active and funded. “It has moved past that tipping point and is profitable. One might see some disappointment with the next set of results – we see it on daily volumes on the JSE, where volumes are down.” This could be an opportunity to add to one’s portfolio.

Chris Reddy, Portfolio Manager at All Weather Capital

Reddy looks after the listed equity and fixed income space. His first pick is the “best performer on the JSE over past 10 years”, Afrimat. He says Mohnish Pabrai’s quote “Good management gives you upside options for free” describes Afrimat perfectly. It has a “truly exceptional management team” and with the shift into other commodities, it is “working off a very low base … the acquisition of one mine, for example, can double their production capacity”.

Reddy says “there has been a trend from global miners to dispose their coal assets and that this creates an opportunity to acquire these assets at a discount”. A situation like this arose with Thungela Resources, which was “recently unbundled from Anglo American. It dropped to R21 on the first day as investors ditched it. That placed it on a less than one times PE [price-earnings] multiple”. Reddy still sees strong demand fundamentals and even with “higher discount rates” still sees “significant upside”.

The last of his picks, Lewis Group “has had a tough few years, but its debtors’ book has significantly improved in the last 18 months”. The business has a “very strong management team, no debt on its balance sheet and it keeps buying back shares”. “We are a happy holder, and see further upside.”

Piet Viljoen, Manager of the Counterpoint Value Fund

Viljoen kicked off with principles he applied when picking stocks.

“The process when making decisions in an uncertain domain is key.”

He elaborated: “I’m going to pick three stocks today but I have no idea whether they’ll be good picks or not. [I] like to look at it like a bundle of twigs. Each stock or twig is quite fragile, it can break. If you tie them together in a bundle, in other words a portfolio, you get something quite robust.

“I try look for hidden gems – I look where no one else is looking. It’s probably fished out where everyone else is fishing. I also try find good management and – as long as you don’t pay too much – let them do the work for you.”

The first, Sabvest Capital, is run by Chris Seabrooke. Viljoen says over the last 10 years, the JSE’s All Share Index has returned 11% per annum (compounded). Sabvest has managed to grow its value at a rate of 22% per annum (compounded) over the same period. “Today, you can buy that R74 for R46 per share [since increased to R48], so why would you want to buy the index? This thing is on sale!”

Viljoen also picked CMH which has “grown earnings faster than the average on the JSE over the past 20 years … You can buy that earnings power at a PE of 9 today.” He says he finds two aspects of this business attractive. “When you enter, you are buying an aspirational product and are in a weak negotiating position.” This makes car buyers price-takers. Also, he says, “car dealerships are mini monopolies” because of the geographic rights granted by OEMs (original equipment manufacturers).

Given the popularity of his original third choice, Afrimat, Viljoen replaced that during the session with Hosken Consolidated Investments (HCI). This investment company owns businesses worth R144 a share and is trading at around R60. At first “the market was very worried about levels of debt and potentially dilute shareholders” but it navigated lockdown without needing to dilute shareholders. This, he attributes to the management of the business who are “proven capital allocators”. There is “upside optionality” with its small platinum asset as well as offshore oil and gas exploration blocks.

Viljoen describes his three picks as “nothing sexy, just some proper hidden gems”

Olwethu Notshe, executive director and portfolio manager at Sentio Capital

Notshe characterises his picks as “South African Covid-recovery plays”.

His first pick, Capitec, has a “great management team” and has two drivers of growth: it has consistently grown the number of active customers (at a rate of over one million a year), and its “second growth vector is the foray into SME space through the acquisition of Mercantile Bank”. Notshe points out that, historically, this segment hasn’t been served well.

Prior to lockdown, City Lodge had occupancy rates over 54%. It has restructured the business and “should be able to navigate the next few years after a rights issue last year”. This is a “recovery play” and “needs 40% occupancy rates to break even”. Currently these are at around 30%.

Similarly, Tsogo Sun Gaming was also heavily impacted by lockdown. Management rightsized the cost base and there was a “significant and quick recovery in gambling revenue as lockdowns eased”. Notshe admits “there is risk in the stock, and that’s centred on the financial leverage in the company”.

Rajay Ambekar, Founder and CIO at Excelsia

Ambekar decided to focus on three smaller cap opportunities each of which “could easily double over the next three years”.

Metair is a business of two parts: energy storage (batteries) and automotive components. The “latter is the more exciting part” says Ambekar. New contracts won in South Africa will see volumes growing 30-40%, which makes the current valuation “very attractive, given strong expected earnings growth”.

Aveng is Ambekar’s second pick – he admits he did consider M&R. “The balance sheet has been fixed” and on a valuation basis, it has a R3 billion market cap with revenues of R25 billion. It “could make R1 billion of normalised earnings” which makes it very attractive.

Finally, the price of City Lodge has tumbled from R30 to R4 in the last three years. Ambekar highlights its “poorly structured BEE deal”. The business doesn’t “need occupancy levels at 60% for them to make good returns”. He notes the “replacement cost of hotels is more than double its current market cap”. Normal earnings would take this business to a PE of seven, he says. This is “very attractive when compared to hotels globally, which trade at 14-20 times”.

The JSE’s Fourie says these live stock picks sessions “will be a regular feature going forward”.

Fund manager Stock pick Market capitalisation* Price change YTD Current PE*
Anthony Clark CMH R1.6 billion 45% 9.33
Afrimat R8.7 billion 40% 13.48
York Timbers R1.1 billion 89% -9.19
Simon Brown Murray & Roberts R4.6 billion 26% -7.12
Sibanye-Stillwater R186.9 billion 2% 6
Purple Group R1.5 billion 62% 62.61
Chris Reddy Afrimat R8.7 billion 40% 13.48
Thungela Resources R7 billion 8.47
Lewis Group R2.8 billion 86% 6.75
Piet Viljoen Sabvest Capital R1.97 billion 64% 6.77
CMH R1.6 billion 45% 9.33
HCI R5.2 billion 7% 10
Olwethu Notshe Capitec Bank R210.7 billion 28% 45.95
City Lodge R2.4 billion 50% -2.37
Tsogo Sun Gaming R9.7 billion 91%
Rajay Ambekar Metair R4.9 billion 34% ­16.76
Aveng R3.7 billion 200% -1.88
City Lodge R2.4 billion 50% -2.37

* As at August 17, data from ProfileData


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I like the idea they must quickly justify their picks… That’s what is going to make this useful to investors 😉

Every professional base his opinions on his perceptions. Perceptions are based upon individual characteristics like understanding of the market, prior experience, education and training, and personal benefits and incentives. Therefore, the opinion says everything about the manager and nothing about the company. They like to impress retail investors with fancy models and investment strategies and styles, but in the end, a person, with his perceptions, has to make the final call. Every transaction is a tradeoff between emotional and rational issues.

Keep in mind that every listed share, after the IPO, always belongs to someone. There has to be a seller for every buyer for a transaction to take place. These parties have opposing perceptions about the same instrument, and both are convinced that they are correct.

Then, we can still add the confusing issue of vested interests. At the time when the Didata share price made an all-time high at R71 per share, the largest international brokers listed it as a buy and used the newsletter to advise their clients to invest in it. That week was the highest transaction volume ever. In technical terms, the price action made a “volume climax” as large sellers unloaded their position on their own retail clients. The share price eventually bottomed out at R2.50.

A market is a wonderful, but challenging place. You can do the right thing and lose money, and you can do the wrong thing and make money. It is simply a probabilities game, like farming. Many times we are merely fooled by randomness.

The buyer and the seller both think that they are right.

But both could be right. Also both could be wrong. It all depends on the future performance of the share relative to the other choice being made by the individual.

Eg. Both are making the correct decision. The buyer is buying into a business that continues to perform and the share price goes up.
The seller takes the money and starts his own business which does even better than the share.
Both made the correct decision because the buyer didn’t have the same option of his own business like the seller.

Both make the wrong decision.
The buyer sells a better share to invest in the current share. He shouldn’t have made the swap because the other share was Capitec.
The seller takes the money to buy his wife a fancy diamond ring. A real collectors piece with a huge fancy yellow stone. A few years later she leaves him. Says she lost the ring in the bathroom at Sandton City.
Both the buyer and the seller loose 😉

No one seems to be aware that finance minister Tito Mboweni has resigned, the Rand took it well initially but is dropping fast now.

My recommendation is resource shares, metals, precious metals and coal will always be sought after commodities and they pay in Dollars.

That is the one business that always works in South Africa.

You cannot loot or burn a mine down.

I do not understand how Retailers are so popular when a about a third of stores were looted or burnt down.

Same for Financials, there are big Covid-19 life insurance claims, Banks are going to pick up huge debt from failed businesses and bankrupt individuals.

You have good points, but at least in this case they need to say why they picked something.

It’s not perfect (is it ever?) but I have more info to now do my OWN research.
I think this is what many miss – you need to do the next step of your own homework & not just follow the “advisors” comments.

Lets see how we doing…. See U can predict the short run!

MTN … went to 136 … @135 waiting to go higher.

Aspen hit 188….. target still 240

Shoprite kissed 172. Itching to go higher.

My recommendations from last week:
MTN between 130 to 140 short term. On it ways to higher levels in the long run.

Aspen(APN) on its way to 240…broke the 160 level…. its been up significantly already this year.

Shoprite (SHP) i think it will reach between 175 to 180.

Oh… and Stay away from Naspers and Prosus … in the short term.

Asset managers are also running for the hills. 🙂 poor fellows.

China wants control of the Tech Giants.
…. what China wants …. China GETS!
Wait for stability.

A good idea for Moneyweb is to revisit these picks in 5 years time and see which analysts equally weighed portfolio of 3 stocks did the best.

If you had bought Clicks; Mr Price; Woolworths 4 years ago you would be financially comfortable. Would like to see what these people picked 5 years ago and what the value of the shares are by comparison to purchase price

Well, you’re right about one of those stocks over the past 5 years. Only CLicks has gone up. Woolworths is 30% lower than it was 5 years and Mr Price is flat. So I guess the difference between us and the fund managers is that while they make educated guesses, we just make guesses.

They say past performances is no recommendation but I look at past performances and it works when you have more or less 25 different stocks. You sell the stocks that did not pan out as you hoped.

If you’re guessing, you’re gambling.
Why not take time to do research or employ a financial guru if you don’t want to do it???

There is no accountability in the financial pundit arena. The more someone is featured, the less likely his or her predictions are to come true. Trust no one who is on any financial news channel or website more than twice a week.

even a broken clock is correct twice daily.

This is something I’ve been saying for ages…
Why should an advisor get fees if they lose my capital? They should be rewarded only if they make money for their clients (imo) with some kind of really small base fee to cover their running costs.

You lose – they charge.
You win – they charge.
So what incentive do they have other than just signing up more clients.

Good feature thanks. Most important insight for me was Piet Viljoen’s quote about individual shares being like twigs that are fragile on their own…therefore essentially saying it is no smart investing in just one or two shares – you need a portfolio of about 15 or so shares.
What I couldn’t quite believe are Piets stock picks …. Sabvest and HCI ??? I know Piet is saying they are trading at discount to nav but he is a professional investment manager…. why outsource that function by buying Sabvest who is itself an investment company that invests in random companies

End of comments.




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