‘Golden nuggets’ after 25 years in the small and midcap arena

‘It’s all about consistency, legacy and reputation,’ says Small Talk Daily analyst Anthony Clark.

RYK VAN NIEKERK: Welcome to this week’s edition of the Be a Better Investor podcast. It’s a podcast where I pick the brains of the top investors in the country, and we try to understand how they approach investments, how they pick winners and what they do when they end up with a dog in their portfolio. The idea is to find those golden nuggets from their perspectives and experiences to assist amateur investors become better investors.

My guest today is Anthony Clark. He’s an absolute legend in the South African small and midcap space, and he’s the man behind Small Talk Daily. He’s also a regular commentator on various media platforms, and he does research on many companies the big asset managers ignore. Anthony, thank you so much for joining me. Just tell us about Small Talk Daily. What is it all about and what do you actually achieve through it?

ANTHONY CLARK: Good morning Ryk. It’s nice to be back and have a platform to discuss a topic which has been very close to my heart for the best part of 40 years. I’m an engineer by training and entered the stock market very late in life for me – at about 26 years old after studying. I moved to this country when I was 29, and I’m probably one of the few analysts on the JSE that has covered the same sector now for the best part of probably 26/27 years. That is an extreme rarity. Now some say, well, why would you do that? The answer is quite simple.

One, because I do all the sector. Secondly, as an engineer I understand the companies, hopefully – but I’m analysing. And thirdly, it’s a space where there’s very little competition. If you’ve spent the last 20 to 30 years building up relationships, networking, [building up] product files, understanding the businesses, you have an extreme advantage [over] anybody else wanting to come into your space because, sadly, due to all of this King Code governance and the like legislation these days, it is extremely difficult for a young professional sell-side analyst to get the same access to management and information that, let’s say, an old dinosaur like me would have.

So this old dinosaur is sitting here with some great information from contacts he’s known for the best part of 20 to 30 years; he carries on writing institutional quality research and occasionally sharing it with the wider public, who are the first, for investments, into the small to midcap arena.

Just as context, when I arrived in the country in May 1996, the first three stocks that I picked up were Bowler Metcalf at 32 cents, Cashbuild at R3.53, and I forget the price of Wilson Bayley, the construction company. Twenty-seven years later I’m still covering them.

So it’s all about consistency, legacy and reputation.

RYK VAN NIEKERK: But you don’t manage a fund, or a fund attached to Small Talk Daily. How do you make your money?

ANTHONY CLARK: Nope. No-o-o. I do not manage a fund – deliberately so, because the very nature of my work consistently has been impartiality. I’m sure you and many of your listeners know that many of the analysts tied to what I would call the ‘bulge-bracket brokers’ – who are associated with international firms or domestic banks – always have an angle. Do they only say nice things about companies because of a banking relationship or a potential deal they want to do, or a loan agreement behind the scenes? I truly don’t believe you get what I would call completely unfettered honest opinion.

I work for myself. I have no boss, so if a company doesn’t like what I write about it and it complains, it goes straight into the bin because I really don’t care.

My job is to look after my institutional clients who have supported me through thick and thin for the best part of 25 to 30 years to give them the type of information which they regularly wouldn’t find out themselves.

If you think of it logically, if you are a senior fund manager at one of the huge asset managers running a multi-billion rand fund, and you may have a small percentage stake in – let’s pick a company – Cashbuild, you are not going to dedicate your time or an analyst’s time [on] knocking on the door, calling [CEO] Werner de Jager, getting an update, looking at what the competitors are doing, because your time is valuable.

But someone like me, who has been covering Cashbuild for 26/28 years, would have that information at my fingertips. So give me a call [and] say: ‘Anthony, give us a quick rundown on Cashbuild. Anything that we’ve missed, or can we see your latest report?’ So I’m providing what I would call the time element in the institutional space, where they simply do not have the time, capability or capacity to cover the near-100 stocks that I look at in the small to midcap universe.

RYK VAN NIEKERK: You’re known for not pulling punches. In many circles you also are not very popular because you are outspoken. But do you sell your research to the asset managers?

ANTHONY CLARK: It’s on a bespoke basis. If I’m asked to do something I would gladly look at it. My main source of modest income is writing. I’m a regular contributor to a number of publications, among other things, and that’s where the bills sort of just get paid. As [we] independents know, including maybe yourself, it’s always a bit of a hand-to-mouth existence when the end of the month comes and you have to scrabble around to pay the bills. But it always seems to get done. I’ve been very fortunate to date that many media publications who have known my work are quite happy to have me on as what I would call a quasi-freelance journalist, and that’s what I call myself these days.

RYK VAN NIEKERK: But do you have a personal investment portfolio in which you invest and use your own research to make investment decisions?

ANTHONY CLARK: The answer is yes and no. Again, it all comes down to reputation and impartiality. When I was trained in London many years ago in the early nineties, I was told by my boss: ‘Anthony, the only thing that you have in life in this career is your reputation. Guard it jealously because once it’s gone you will never get it back.’

So my personal pension fund, as I often tweet, is managed by an independent financial advisor, former clients of mine based in Claremont. They have my retirement annuity, they have my preservation fund among other things. I can give them directions, say: ‘You know what, I really don’t want to be in these bulge-bracket stocks. I want to be in these areas …’ and then they tailor things to my requirements. But I physically do not look after money myself, because then the institutional clients would really wonder: Well, if Clarky is really writing about Afrimat, is he writing about it because he owns it or is he writing because he wants to do something?

When I write something, you can absolutely be assured I’m telling you what my current view is. There is no angle. There is no side line. There is no kickback. There is no incentive because I’m not a bulge-bracket broker. My job is to give, as I said, unfettered ultimate independent advice. I can tell you that my institutional support base appreciates that, because in many cases there’s an angle.

The most important thing, if I can take a dig here at somebody – but not in an impolite way – [as] I read a broker report this morning on a large poultry stock which I’ve covered probably for the best part of 15 years, they are saying: ‘Oh, we are expecting some second-half problems right now due to the high input costs of maize and soya and the difficulty to pass on these increases to a constrained consumer.’ I thought to myself, mmm, this has only taken you like nine months to work that out when I was writing about this in August/September last year.

So the benefit of being a complete independent is you can run around, meet the executives, go to as many meetings as possible, speak to people in the industry – who perhaps have no relation to a company which you’re analysing – to get a holistic balanced view, and you can come to market about information significantly faster, whereas a friend of mine who works for a large, bulge-bracket broker, a US one, [has] to write the report. It then goes to New York for checking. Then it goes to London for legal. Then it comes back to this country for editing. Then it has to be proofread and managed with desktop publishing. A week or two later the information gets published.

By then it is so out of date, who cares?

My information, the second I write it and spellcheck it – there’s always the odd grammatical error, I don’t care – it goes out.

So you are getting some of the fastest, best information in the small to midcap market currently available. I believe in this country.

RYK VAN NIEKERK: Some people may say it would be better if you had skin in the game because then you use your own advice to invest. What is your response to not having skin in the game, and to the angle that people would say: ‘Listen, if he’s not buying what he says you should buy, why should I?’

ANTHONY CLARK: Oh, well, I didn’t say I had skin in the game. I told you that my money is administered by an independent financial advisor based in Claremont. If I indicate to them that I’m very keen on something, and if they agree, they will happily put my own money in. That is the case. When I look at my investment portfolio, which actually had a statement sent through to me overnight, I very rarely change anything. I’ve held some stocks for the best part of 10 or 15 years, and I’ll give you one example. In fact, two examples.

Many, many, many years ago when I was working at the Board of Executors at Nedbank, there was a small private equity company out of the PSG stable called Paladin Capital. Few will remember it. They delisted it and, as part of that delisting, they unbundled their then embryonic stake in Curro Holdings and gave you the option to take cash or PSG shares before the unbundling of Capitec and so on, at the equivalent of R33. So I took my Curro shares at the equivalent of R1.78, and I took my PSG shares at the then equivalent of R33.

Now PSG, before the Capitec unbundling, hit R300[/share]. I still have the PSG and I still have the Curro, and that’s 15 years later.

Invicta Holdings is a company that I’ve held for over 10 years. Kaap Agri, which I’ve been following for the best part of 15 years – I first bought my stake in my pension fund at R7.30. I still have it 15 years later. That gives you a semblance of when I spot a great company, and if I think the market is missing a trick here, and if the underlying management I think are sound, and the industry that they play in I believe has a long term future.

Yes, there are swings and roundabouts and some bullets to dodge along the way, but [with] the very essence of why I like that company, if it still remains in place, I will happily hold until the end of time.

I went on public record a little while ago. Marc Hasenfuss in the Financial Mail said Kaap Agri is the only stock he would ever buy in retail, to which I countered on my Twitter page: ‘Kaap Agri is the only stock that I would never sell in my portfolio.’ [Ryk laughs] So, if that gives you a semblance, I only have probably 15 or 16 stocks.

And then I have usually the cadre of some offshore funds for exposure to the S&P 500, the FTSA, the Euro Index and so on. But mostly a reasonable proportion of my modest little pension fund is invested in the very universe which I cover because, as you correctly say, if I’m not prepared to put my own money into a stock that I like, why the hell should I recommended it to you?

RYK VAN NIEKERK: Well, small and midcap stocks are interesting. Obviously this podcast is aimed at amateur retail investors and many people look at the small caps because, number one, the share prices are normally low and you can get many shares with an investment, and people also think there’s a lot of upside – or more upside – for smaller stocks than the big established stocks. Many analysts would also only look at the financials and maybe attend an investment conference or meeting with the board.

But with small caps you also see a lot of reaction, and external developments can have a much more significant impact on the particular company. So how do you go about analysing a company and ‘picking’ the winners?

ANTHONY CLARK: That’s a great question, and I’ve actually started doing that right now. I mentioned before we came on air that I’ve started to pick up coverage of two new companies. I’m an old-fashioned analyst. I have an old PC here running Windows, which drives me insane. I’ve put my MacBook on ice because I couldn’t take it anymore.

I work with enormous volumes of paper. I’m looking at old-fashioned filing cabinets here, piles of old Business Days and manila files – those old fashioned manila files stuffed full of annual reports, press cuttings, handwritten notes, results presentations, sector comparatives, industry comparatives. I build up these enormous files on any company that I look to cover. It then gives me a complete overview. So I haven’t just gone in to meet the management and they’ve given me their story. It can sometimes take me over a year to feel comfortable enough to actually make a recommendation.

Again, I always like to give real-world examples [such as] Renergen. Renergen for the last year-and-a-half has been one of the hottest stocks on the JSE. It is trading roughly now at about R40 in round numbers. When I first selected that stock at the beginning of 2021, it was trading at R12 to R13. I’d actually been monitoring Renergen for years before that event, much to the disgust of the CEO, Stef Marani, who wanted me to cover the stock. I flatly refused, not because I thought the company was bad or was speculative, but it didn’t meet the criteria at the time for me to put my reputational name to a physical recommendation.

It was an exploration company looking for gas in the Free State. It was a significant capital commitment. Would the commissioning of a plant actually occur? Would the capex go to time? It was a gaseous component actually of world-class standards. Did it receive the competence person’s report, [and] all the tick lists that you need for a company to suddenly go from being what I would call a development company to one going into commercial operation and actually physically making money.

RYK VAN NIEKERK: Has that earned any revenue?

ANTHONY CLARK: Exactly. But it’s all about investor sentiment because anyone can dig a hole in the ground; they may hope to strike riches, but if you do dig a hole in the ground and you actually strike riches, and those ‘riches’ are confirmed by an independent recognised body, you can then start doing all the clever stuff that all the wonderful CFAs [chartered financial analysts] and accountants do – the discounted cash flows, long-term models, share price and on and on – to say, well, if they were to start digging this stuff out of the ground, or in Renergen’s case extracting the gas and then converting it into liquid natural gas and helium, what will the potential revenue be on a certain production per day, per month, per year, less their costs?

That point to me occurred in November, December 2020, when I was looking at a combination of things that I look at.

It dawned on me that this company was moving from the exploration and speculative phase to the commerciality phase. Again, they haven’t made any money, but what it does is it gives investors, particularly institutional investors, a sense of confidence of what they’re investing in actually has a tangible physical future.

It is no longer a hole in the ground. It is a hole in the ground that can actually make money.

I thought on that scenario alone, once that information starts to filter out into the marketplace, the share price will start to react to what I would call the commerciality of a former speculative hole in the ground. From R13 to a high of R44 we’ve now had the Central Energy Fund invest 10%, we’ve had one of the world’s richest mining executives, Robert Friedland from Ivanhoe [Mines] put in $250 million. I’m sure there are more investments to come.

The second part of this transaction, which is the expansion of Virginia Phase 2, will cost between R12 billion and R13 billion, which is two-and-a-half times current market cap, showing you that certain astute investors have suddenly decided to put their own money into this company. It’s all about spotting things early and anticipating, if this were to occur, would ‘Two plus two equal four?’ in the minds of astute institutional investors. And that’s a trick that I get up to. Do I try and spot things early? The answer is I try my very best to spot things way before the crowd because, by the time the story is literally in the press, the share price has run. It has run hard and all the easy money has been made.

I try to catch things in what I call the ‘initial upwave’.

If someone like myself starts covering a stock and then starts writing about it and analysing it, many of my clients say: ‘Well, hang on, he works for himself. He has no agenda. If he’s covering this stock, why is he doing that? For what reason is Anthony suddenly covering this company, because [his] time is inherently valuable?’ And then the questions start: ‘So why you looking at this company? What have you seen that we haven’t seen?’ Then it starts developing a story and life of its own.

There’s a classic example for you. Renergen was one of those, and I’ve got two others right now completely ignored by the market which I’m working on – but in plain sight, quite major companies in two industries. But they have even no coverage or maybe one analyst looks at the stock as of modest consequence.

RYK VAN NIEKERK: Come on, name them, please!

ANTHONY CLARK: I can’t do that. If I named them, once again I would blow my reputational cover – and it would be grossly unfair. I’ve always been fair in what I do. Everybody gets same information, roughly at the same time. I can’t favour one over the other because, then again, my personal reputation and the integrity that I’ve built in the last 26/28 years simply would be blown. It’s just not worth it – it’s as simple as that.

RYK VAN NIEKERK: What is your hit rate? How many winners do you pick over losers?

ANTHONY CLARK: O-o-oh, that’s a very interesting question. I usually put out a top five list of stocks every year, because I have to – I don’t mean to use the foul [analogy], but I’m sure your editors will find a suitable thing – put my [neck on the line] every year because, as you say, what good is an analyst without actually having a recommendation list?

So this year, at the beginning of January, I [had] to look at my benchmark indices, which is a JSE 201 small cap, a JSE 202 midcap. And, of course, a JSE 203 All Share Index.

So this year I picked my five stocks which, for varying special situation reasons, I believe would outperform the general benchmarks.

They were eMedia, which owns eTV, Invicta Holdings, which most people would know is a supplier of industrial bits and bobs and parts and widgets, Renergen, which I’ve mentioned before, the exploration gas company in the Free State, Sabcap [Sabvest Capital], which is the investment holding company run by the extremely astute investor Chris Seabrooke. The last company was Wesizwe Platinum.

Now, as I’m looking at the list right now – and I updated this just before we came on air – my top five as of right now is having a return before dividends of 16.48%. The JSE small cap as of right now is up 3.85%, and the midcap is up 3.17%, and the All Share as of right now is down 0.5%. So I’ve smashed all my indices and I’m still very happy to own those five counters, because each was chosen for a specific reason, where I believe that better-than-expected corporate results, some form of corporate restructuring, a possibility of a buyout would occur during the course of a-next-12-months which should lead that basket of shares to outperform the index. So far I’m performing 500% better than the index.

RYK VAN NIEKERK: Do you short any shares?

ANTHONY CLARK: No. Firstly, I’m not that clever. Secondly, again, just for your listeners, I will relate a story. I first started investing for myself when I was 13 years old. I was working as a stacker of shelves in the local co-op supermarket, earning £23 a week part-time, working after school. I loved the stock market.

Back in the eighties Margaret Thatcher, the conservative government minister or prime minister, was privatising the state-owned companies British Telecom, British Gas, British Petroleum, British Airways and so on.

I thought to myself that British Airways, when it was listed, was looking far too high.

So in the old London system you could short a share on what was called the ‘account system’. If you sold a share on a Monday, you only had to close your position the following week on Friday. So you basically had 10 working days to actually run a position – either a long or a short – before you had to settle your account. They would just pay out the profit or you’d have to pay in the loss. So me, being a clever 14/15-year-old, thought I’m going to short British Airways on opening, which I did. I went in with pretty much all of my savings of the preceding week or two.

The share price ran, I had to settle my account system at the end of the fortnight, and I was wiped out. I vowed from that point I would never short a share again.

I’m 55 in a October, so 40 years later I have never shorted a share.

RYK VAN NIEKERK: Interesting story.

ANTHONY CLARK: You sometimes have to learn from your mistakes.

RYK VAN NIEKERK: Yeah, absolutely. Retail investors or amateur investors – what advice would you have for them, because obviously they can’t go through this analysis process you are going through.

ANTHONY CLARK: The answer is yes and no. I have luck on my side. I’m an engineer by training. I went back to varsity to actually study company financial reporting and marketing. So that, combined with a near-30 year history of covering companies in one sector, gives me an advantage over the average man or woman in the street. But it’s not to say that the average man or woman in the street does not have an advantage. They do, because in today’s modern society with the internet, many of the same information tools that we as professional analysts have on tap are available. You can go into any company’s website and download histories of annual reports, results presentations, Sens announcements. That leads you to build up a picture of what is going on over the long term in a particular company that you want to follow.

The press in this country is quite active – the magazines that we know of, the newspapers. I’m a compulsive reader of Business Day, Financial Mail, Finweek when it was around, and all the other little titbits. I cut those out and I keep them in a file, because you want to be well informed. So I tell, in particular young amateur investors who are looking to make a mark for themselves: ‘Pick a stock or an industry that you genuinely love.’ If you are lady that who loves shopping, I’m saying, you know what, cover retail shares. If you are a guy who loves cars, I’m saying, you know what, take the automotive sector or the logistics sector, because you will have an inherent interest in that sector that goes above and beyond just looking at the company. There will be a passion there. It’ll be that very passion for you to actually start looking and digging and reading and analysing, but it’ll give you hopefully some additional information above and beyond what the average [person] in the street will have – or perhaps in most cases the average institution.

So I tell people in the webinars that I do, and particularly black investors who are the future of tomorrow: ‘You have to start reading and reading consistently, and then remembering what you do and keeping files and detailed notes. Through that – it is laborious – you start building up an understanding of what is going on in the market.’ The rest is history.

RYK VAN NIEKERK: Yeah. Don’t stand around a braai with a beer in your hand and then get a ‘hot’ stock tip and act on that. You need to really do your research.

Last question: how long do you hold shares?

ANTHONY CLARK: Me? As I said to you earlier, depending on the nature of a company, indefinitely. As a special situation actually unfolds, if a takeover that I anticipate happens, if a corporate restructuring happens – like PSG, for example, is going through a corporate restructuring – then of course you naturally sell and move on to the next stock. So in most cases, as [renowned investor] Warren Buffett would say, you buy great companies and you hang on to them until something materially changes; then you review it. That’s how I work.

Stocks that I’ve owned for 20 years I still own. But if something were to dramatically come along to change that view, I would have to reappraise.

RYK VAN NIEKERK: Anthony, thank you so much for your time today. That was Anthony Clark. He is the man behind Small Talk Daily, and one of the legendary small and midcap analysts in the country.

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Excellent interview with someone who’s got in there and plugged away, not sitting in a corporate office on a fat salary and huge expense account.

I like the comment that he’s “not that clever” to short stocks.

What a wonderfully, refreshingly honest person and interview.

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