Category Archives: Investment Strategies

Institutional Blindness


The Business Day reported on 10th April 2019 on the Investment Forum in Sandton where several asset managers talked about the major share collapses of the past three years – most notably Steinhoff, EOH and Tiger Brands. The big institutions and major fund managers (like Alan Grey, PSG and Coronation) lost hundreds of billions of rands when these stock market “darlings” suddenly collapsed.

But in each of these cases, there was clear technical evidence that all was not well long before they collapsed.

STEINHOFF

In the case of Steinhoff, the share made a perfect declining triple top at least 15 months before the Viceroy report came out and caused the share to collapse. Consider the chart:

Steinhoff (SNH) January 2016 to April 2019 – Chart by ShareFriend Pro (Click to Enlarge Image)

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Unbundling


From time to time, listed companies may take the decision to “unbundle” one of their subsidiaries or strategic investments to their existing shareholders. This means that they decide to give their shares in that subsidiary (or strategic investment) to their shareholders in direct proportion to the number of shares which the shareholders are holding on a specific date.

Their reasons for doing this are varied, but usually it comes down to a decision that the board has taken that the subsidiary or strategic investment concerned is no longer part of their “core” business.

For example, if company “A” owns 70m shares in company “B” and company “B” has a total of 100m shares in issue, then company “B” is a 70% subsidiary of company “A”. If the board of directors of company “A” decide that company “B” is not part of their core business, they might decide that, instead of trying to sell their shareholding in that company, they will unbundle it to their existing shareholders. If company “A” has 700m shares in issue at the time, then the shareholders of company “A” will each get 10 company “B” shares for every 100 company “A” shares that they hold – on a specified date. Read More

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

Relative Strength


Analysing the market is mostly about trying to determine where the best opportunities lie. There are about 400 shares listed on the JSE, but which of these offer the best opportunity for profit? So finding the best share invariably means comparing one opportunity with another.

There are very few indicators which do this better than the comparative relative strength.

This indicator (found at the bottom of a chart in ShareFriend as “CRSI”) is simply a formula which divides one datastream by another and then draws a graph of the result. For example, the price of Dischem was 2694c at the close of trade on 14th February 2019. On that day, Clicks closed at 17700c. So if you divide 2694 by 17700 you would get 0,1522 – that is a relative strength point. Read More