Best of Ghost Mail: Not all dips are created equal 👀

Have you been buying the dip? 👀In the latest Best of Ghost Mail feature, the Finance Ghost explores how not all dips are created equal, looking at the retail and banking sectors. 

If you woke up in 2011 and looked at your share portfolio, you would see a price for The Spar Group Limited (JSE:SPP) that looks remarkably like the current level. Draw a long enough share price chart for this retailer and you’ll see the famous sky-diving technical pattern, or perhaps even a variety of the “vomiting camel” that gets joked about on Twitter.

In case you’re now wildly confused, the point is that the recent share price movement has been a vertical drop that would make even Tom Cruise feel nervous. The market isn’t showing any love at all for Spar at the moment, with the wholesaler struggling in an environment of load shedding and high fuel costs.

Spar has also been pretty good at scoring own goals, which is why the market is a bit tired of buying the dip on this one. There’s a general concern around food businesses in this environment, with load shedding obviously causing far greater problems in a food supply chain than a clothing supply chain, for example.

Another time travel machine is Tiger Brands Limited (JSE:TBS), trading at 2009 levels. If you think buy-and-hold-forever is always a smart strategy on single stocks, you need to draw more long-term charts. The concept of buying equity exposure and keeping it in a drawer forever only works with broad exposure in ETFs that give market exposure rather than individual company exposure.

Or you could just buy Apple Inc (US:AAPL) and Microsoft Corp (US:MSFT), come to think of it.

Everything else requires careful position sizing and clever tactics around entry and exit points. The market has only been heading for the exit on Tiger Brands in the past week, despite the company managing to modestly increase HEPS in the latest period.

If you held both stocks this year, you would be down 28% in Tiger Brands and 21% in Spar. It’s been rather difficult to make money in the food sector this year, with the likes of RCL Foods Limited (JSE:RCL), Astral Foods Limited (JSE:ARL) and even RFG Holdings Limited (JSE:RFG) currently in the red on a year-to-date basis.

Retail stalwart Shoprite Holdings Limited (JSE:SHP) is down 11.9%, although that performance is fantastic compared to sector peer Pick n Pay Stores Limited (JSE:PIK) and its 42% decline.

At this point, you must be wondering if any stocks can bounce back in this environment. Perhaps Pepkor Holdings Limited (JSE:PPH) will give you some hope, with the recent pain in the share price recovering rather quickly. Admittedly still down over 26% for the year, at least there was some solid dip buying in the past week after the initial negative reaction to earnings.

Load shedding is relatively less painful for clothing and homeware retailers than for those who need to maintain cold chains. Although Pepkor is spending less on diesel as a percentage of operating expenses than say Tiger Brands, the knock-on effect on consumers is clearly visible. The trend is clear across the retail industry: cash sales are under immense pressure and credit sales are the only source of growth.

This is clearly not sustainable, particularly with high interest rates and other inflationary pressures being felt across the board.

Not all dips are created equal, but the dips in the retail sector aren’t necessarily over yet. There are respected names in the local market who are buying some of these companies, but I would suggest modest position sizing and leaving cash available to bring the average in-price down if the dip keeps on dipping.

A quick note on banks

This environment should be highly lucrative for banks, with ongoing demand for credit and higher interest rates that drive an expanded net interest margin.

You’ve probably notice that your current account doesn’t offer a higher rate, yet your bond repayments are adjusted almost immediately when rates increase. This is precisely how banks increase their margin, along with something known as the endowment effect – the bank lending out its equity at a higher yield than before.

Technicalities aside, the word “should” is in the spotlight here. Share prices should be doing well, yet they aren’t. Capitec Bank Holdings Limited (JSE:CPI) has been hammered 26% this year, a victim of its valuation. Absa Group Limited (JSE:ABG) is down 19% as an unfortunate outlier, and Standard Bank Group Limited (SBK) has dropped nearly 6%. Nedbank Group Limited (JSE:NED) and Firstrand Limited (JSE:FSR) are slightly in the red.

The culprit is a souring of sentiment towards South Africa in the wake of political noise around Russia. The lack of economic growth is also a major culprit. There are also concerns around credit quality, with Nedbank’s latest results indicating that the credit loss ratio is now breaching the target through-the-cycle range.

Nedbank gave useful guidance around the effect of further interest rate hikes, which the bank believes will no longer be a net positive for the business. This means that impairments would offset the higher net interest income.

It’s really disappointing to see that the party is arguably over for local banks, as the share prices make it look like there wasn’t a party at all. In hindsight, the perfect trade was to sell in March before the share price slide really began. 

Whether we like it or not, stocks are a function of the broader macroeconomic and geopolitical environment.

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