Monthly Archives: March 2019

The Multiple

Probably one of the most difficult problems that the private investor faces is the problem of selection. There are approximately 400 companies listed on the Johannesburg Stock Exchange, so how can you select the best opportunity from these – especially when each is a complex organisation with many strengths and weaknesses.

One of the mechanisms used by investors is the earnings multiple. The multiple is the number of times that the company’s earnings per share (EPS) can be taken out of its current share price in the market. Thus, if a company is trading on the JSE for 1000c today in the market and in its most recent annual financial statements it reported EPS of 100c, then it is on a multiple of 10 – or, put in another way, at the current rate of earnings it would take exactly ten years to recover the current cost of the share in the market.

The multiple of a share shows how investors rate the company. If the company has a high multiple, then it means that investors are prepared to pay much more for 100c of its profits than they are for 100c of other companies’ profits. Thus, for example, right now investors are willing to pay 31 times Capitec’s EPS to buy one of its shares, but the same investors are only prepared to pay 11 times Standard Bank’s EPS for its shares. This is because Capitec is more “highly rated”. Investors believe that the Capitec business model will produce a bigger, better and more reliable stream of EPS in the future than Standard Bank’s will – much bigger and better. Read More

Rights Issues

The Johannesburg Stock Exchange (JSE) consists of two markets – a primary market where companies sell their shares to the public in order to raise capital and a secondary market where those shares are then bought and sold freely between members of the public. Transactions in the secondary market do not result in any funds going back to the companies concerned, but listed companies are very interested in maintaining a strong, fluid secondary market with their shares changing hands between members of the public at good prices.

The reason for this is that it is impossible to sell additional shares in the primary market without a good secondary market for the share. Members of the public would not be interested in buying shares in the primary market unless they knew that they could sell them easily in the secondary market – whenever they wanted to. So the two markets work together, enabling members of the public to participate in the growth potential of listed companies, while allowing listed companies the facility to raise additional cash when they need to it to fund their businesses. Read More

The Confidential Report – March 2019

US Economy

American GDP growth in the 4th quarter of 2018 was 2,6% – slightly higher than the 2,4% consensus forecast, but noticeably lower than the third quarter’s 3,4% or the 2nd quarter’s 4,2%. This still gives America an average GDP growth rate of about 3,1% for 2018 – which may not sound like a lot, but given the size of their economy (more than double the second largest economy in the world) it is very significant. It is enough to drag the rest of the world economy out of recession and into growth.

Obviously, this must be seen in the context of Trump’s substantial once-off tax cuts which are probably beginning to wear off now. It must also be seen in the context of the massive monetary policy stimulation of the previous ten years.

All of this is playing out in the stock market as can be seen in the chart of the S&P500 index:

S&P500 Index September 2018 to March 2019 – Chart by ShareFriend Pro (Click to enlarge image)

Here you can see that, following its record closing high of 2930 which occurred on 20th September 2018, the S&P entered a corrective phase. That correction was made worse by Trump when he effectively shut the US government down for five weeks in December. The US shut-down resulted in a “V-bottom” because as soon as investors came back from their year-end holidays they bid the market back up steadily. Read More


The concept of resistance is a very important part of the private investor’s understanding of the market.

Resistance occurs where a share or an index (or any financial data stream) reaches a top where it has been before – and then the question arises, “Will it penetrate that level?”

Perhaps there are large sellers who have standing orders with their brokers to sell out when and if the share reaches that level. That means that as soon as that level is reached, the share will fall back on increased selling.

This process of the market bumping its head against a ceiling can lead to a double top or even a triple top. Sooner or later, however, the situation will be resolved. Either the level will be penetrated convincingly on the upside or the market will become afraid and fall back. So resistance levels inevitably cause a period of uncertainty as everyone waits to see what will happen. Read More