Markets & Equities

Is there value hiding in quality shares?

When we talk about the biggest comeback of all times, I’m sure that Tiger Woods will stand out as one of the greatest ever. Until quite recently still, whenever the name Tiger Woods was mentioned, most people felt that he USED TO be one of the greatest golfers ever and that he was likely to announce his retirement any day now. Sadly, his body had endured so many surgeries over the years, that his best hope at a proper recovery amounted to being able to at least spend some quality time with his kids in the pool.

He spent 1 876 days without a single win (source: BBC) and at one point, was ranked 1 199th in the world. For the purpose of golf, he was basically a write-off. But his willpower and determination – which is a mark of all quality sportsmen and women – surprised everyone this year when he won the Masters at Augusta National Golf Course in the USA in April.

Anyone who had considered Woods a write-off, obviously made a huge mistake. It’s in our nature to tend to give up on something if it just “doesn’t work anymore”. When we take a look at our local stock market, it’s no surprise that in the past few years, there were several things that were just not working either.

When we look at shares with specific characteristics (or factors) that ‘went under the knife’ like Tiger, quality shares seem to stand out like a sore thumb. Quality shares are valued according to strong return on equity (ROE) and the lowest possible enterprise value to free cash flow ratio.

Graph: SA Listed Factor ETF’s (source: @SchalkLouw & Thomson Reuters)

The Satrix Quality South Africa exchange traded fund (ETF – which passively selects shares based on these ratios) dropped by more than 3% over the past 12 months (until 8 September 2019), while the same management company’s ALSI index fund barely managed to deliver positive growth over the same period. This happened in an environment where the MSCI World Quality Index was one of the best investment choices as it managed to outperform the MSCI All Country World Index quite comfortably.

While I’m not calling local quality shares the ‘Tiger Woods comeback’ of the South African stock market, I decided to dig a little deeper into this sector to look for possible opportunities. These shares are ultimately labelled ‘quality shares’ and with the assistance of Pieter-Jan van Niekerk, equity analyst at PSG Wealth Old Oak, I managed to find some shares that may just be restored to their former glory.

Mr Price

Mr Price said earlier this year that it was anticipating a challenging first half of the 2020 financial year, but expected an improvement in the second half. The group has delivered an average return on equity of 43.7% since 2009, which is well above the industry mean of 25% according to data provided by Thomson Reuters. Relative to peers, the group has low debt levels and is a highly cash generative business. Mr Price is well-positioned to benefit from a recovery in the local economy.

Tiger Brands

After the confirmed outbreak of Listeriosis in December 2017, Tiger Brands has lost nearly half of its market capitalisation. Higher input costs and a challenging trading environment has put further pressure on operating margins. The company’s debt levels are below the long-term and industry average. Should future earnings revert back to historical levels, Tiger Brands could offer value to long-term investors.

Standard Bank Group

Standard Bank has managed to grow its earnings by 9.72% and its dividend by 12.72% year on year over the past five years. The group is likely to see most of its growth come from regions outside of South Africa, such as East and West Africa. 38% of the group’s earnings are non-South-African, which provides greater diversification and exposure to faster-growing economies in the rest of Africa. As at the time of writing, Standard Bank traded on a trailing dividend yield of 5.42% and a price to earnings ratio of 10.66.


The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

 

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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