Best of Ghost Mail: Can Winners Keep Winning?

It’s been a tough year for local equities, but there have been some strong performances on the local market. What can we learn from them and can they continue?

When interest rates are low and everything seems to always go up, a strong share price performance doesn’t necessarily tell you much about a company. The old saying is that a rising tide lifts all boats. If there’s one tide in this world that people have learnt about the hard way, it’s interest rates. Low rates lifted all boats in the pandemic. Subsequent rate hikes ceremoniously deposited many of those boats on the rocks.

The market is littered with companies that have sold off sharply in an environment of higher rates. As you mature as an investor, you’ll learn to tell the difference between companies that are objectively poor and thus dropping in value for good reasons, and those that have solid underpinnings but were simply trading at an unsustainably high price. The former should be avoided and the latter represent an opportunity, but one that requires patience.

When a share price has done particularly well during a tough period, that sends a message of resilience and growth. Although one must be very careful not to chase winners too hard, it doesn’t make sense to avoid every winner based on the blanket assumption that the good performance can’t continue.

So, which of the winners this year look interesting?

Spur: holding its own in a tough market

Famous Brands released a trading statement and it doesn’t look good, with the likely outcome that HEPS will be lower year-on-year. The share price has had a volatile year and is down slightly year-to-date. In stark contrast, Spur is up 36% for the year and seems to be hanging onto those gains, despite the difficult update from Famous Brands.

When a company’s share price doesn’t get hurt by a competitor releasing unfortunate numbers, the market is arguably sending a message that the individual company strategies are at play here rather than the overall market trend.

Spur’s management team is executing to a high standard in this market, resonating with South Africans trading down at restaurants in search of value. We still want to take the family out (and especially the kids), but it really helps to save money in the process. In fact, it’s hard not to notice that the difference between the cost of groceries (particularly convenience meals) and the cost of food at quick-service restaurants has narrowed. Another factor could be load shedding, which makes it a lot more difficult to eat at home.

Only time will tell how the restaurant vs. grocery store battle plays out if the current relief from load shedding continues. For now at least, Spur has rewarded investors this year and the outperformance vs. Famous Brands could easily continue.

On a Price/Earnings multiple of 11x, Spur isn’t exactly as cheap as a mid-week special. The dividend yield of 6.8% helps though, demonstrating how successfully those multiples flow through to investors as dividends.

If you want FMCG exposure, it’s time to get creative

Retailers have had a rough year. Food producers haven’t been any better, dealing with multiple operational challenges in South Africa and facing the upstream pressures from retailers. The fast-moving consumer goods (FMCG) sector as a whole has been an ugly place to have your money this year.

There are exceptions, of course. Truworths came into this year at a depressed valuation and played catch-up in a big way, with the share price up 32%. This has been a classic example of a valuation dislocation. These situations are great for swing trades, where a position is put into a portfolio with a short-term mindset. There’s nothing wrong with this, provided you are disciplined.

Importantly, a five-year chart for Truworths suggests that longer-term investment strategies probably won’t be rewarded by the company, with the share price down roughly 6% over that period. Valuation dislocations aren’t enough to escape the South African challenges over a longer period.

To play the FMCG game with a stock that looks far more interesting for a long-term strategy, you could consider CA Sales Holdings. This is a southern Africa play, not just a South Africa play. In fact, Botswana is the company’s home market. This group is interesting in that revenue is earned based on the flow of goods from suppliers to retailers. There are numerous logistical challenges to navigate in breaking into these markets and maintaining shelf space. CA Sales Holdings earns a steady margin on the goods that it helps manage, regardless of whether they are high margin or low margin goods.

Effectively, the company is a play on the flow of goods rather than discretionary vs. staple goods. This is a good position to be in at the moment, as discretionary (higher margin) goods are under pressure. Rather than struggling with the impact of margin mix, the company benefits from inflationary conditions that increase the value of all the goods that the company touches.

The share price is up 40% this year. On a Price/Earnings multiple of 8x, there’s room for more happiness here. In fact, that’s still less than Truworths and its multiple of 8.5x!

Do any of these companies get your vote, or do you have your eye on something else?