Viceroy and Capitec

1 February 2018 By PDSNET

The second Viceroy report on Capitec Bank may be a miscalculation. It is difficult to tell. On the face of it, there is nothing wrong with Capitec. It is extremely well-managed, strongly capitalised and has its parent company, PSG, and the South African Reserve Bank to support it. But can you be certain? The extraordinary events of 26th, 29th and 30th January are typical of the type of difficulty that private investors occasionally experience in the market – a high quality share which is not behaving as it should. Of course, following the Viceroy revelations about Steinhof, investors are feeling very skittish about anything that Viceroy does and so when their report on Capitec came out, investors ran for the hills. The report was issued on 30th January, but the share started to fall heavily three days earlier on the 26th – showing that someone knew what was happening and traded on their insider knowledge. The share price collapsed from over R1000 to about R700 in a few days. The CEO was not slow to say that he disagreed with the Viceroy report – and he certainly didn’t resign like Marcus Jooste did at Steinhof. But how can you be certain? What should a private investor do in this type of situation. We suggest three simple ideas:

  1. The major difference between Capitec and Steinhof is that Steinhof had been falling for over a year before the Viceroy report was published and it collapsed. No one using a stop-loss strategy would still have been in Steinhof when the collapse took place.
  2. Never stop out of a share until it closes below your stop – in other words do not pay too much attention to the intra-day froth in the markets. Focus rather on the closing price.
  3. Once you are well “in-the-money” on a high-quality share investment you can use the long-term trendline to give you your final stop level. In the case of Capitec this would have given you a stop of around 90000c – consider the chart:
 
Capitec (CPI) January 2016 to January 2018 - Chart by ShareFriend Pro
You can see here that despite the massive intra-day sell off, the Capitec share price actually closed above its long-term upward trendline at 91592c on the 30th. This was because large institutional investors and other professionals quickly snapped up everything that was available for less. However, when the share fell further on the 31st it broke clearly though that trendline, indicating that something serious was probably wrong with Capitec and giving some credence to the Viceroy report. Of course, there would have been nothing to stop you from selling Capitec before it reached its stop. Your stops are your final last-ditch strategy to protect your capital, but selling earlier because you are nervous or you have a “bad feeling” can be good. Remember, when you sell you are only forgoing possible future gains, whereas if you continue to hold you are risking actual capital. If you feel uncomfortable then it is always better to sell and watch and wait. Most high-quality blue chip shares have a long-term upward sloping trendline – like Capitec. Consider the chart of Dischem:  
Dischem (DCP) April 2017 to January 2018 - Chart by ShareFriend Pro
Even though recently listed on the JSE, Dischem has established a very nice long-term upward-sloping trendline with two very clear touch points in April and September 2017. Using that trendline and projecting it forwards, we can establish a final stop-loss level at roughly 3300c now. From this chart you can see that Dischem has probably run a little ahead of itself since that last touch point in September, so you shouldn’t be surprised to see it correct back to that trendline. And if you paid, say 2500c for your Dischem shares, then the 3300c stop still leaves you well in-the-money. Nobody likes to be panicked into selling a really good share, but, at the same time, a private investor must always have a stop-loss level. If you just use a 10% stop off the highest price which the share reached since you bought it then you could well find that you are forced to sell a good investment prematurely. However, if that long-term trendline is broken then it is an indication that something is badly wrong and you should take your profit and get out. That is what you can learn from what happened to Capitec.  


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

Gold and Harmony

In our last Confidential Report, published on 6th March 2024, we drew your attention to the fact that the US dollar price of gold was about to break up through a critical resistance level at $2060. Gold has now moved up to $2166 so this observation provided an opportunity for private investors to make a significant capital gain, either in actual gold

Reverse Takeover

At the end of October 2023, Mix Telematics (MIX) was a relatively small fleet management company with a market capitalisation of just R2,3bn listed on both the JSE and the American NASDAQ. Its shares on the JSE were wallowing at a low of 380c. This compares with its competitor, Karoo (KRO), also listed on the JSE, but which was at the time, more

Rare Opportunity

You may not have been aware of it, but last week, between Monday and Friday, there was an opportunity to make an 80% profit on your capital. This opportunity occurred because of insider trading on a little known and traded share called Quantum Foods (QFH) in the poultry and animal feeds business.

Generally, the poultry business is

Excessive Bullishness

On Friday last week, the S&P500 index posted yet another new record closing high, but this time just one point higher than the previous day at 5088. This means that the index, which measures the progress of the 500 largest companies on Wall Street, has been climbing without a significant correction for nearly four months. Consider the chart:

Lessons from Transcap

As a private investor it is very important that you study what has happened in the past and learn from it. The progress of Transaction Capital (TCP) has provided us with an excellent opportunity to examine and learn from a complete cycle in an institutional favourite share. We can examine the entire cycle and see how to profit from it. In this regard, it is important

Sasol

Sasol is a company originally established in September 1950 by the National Party, to counter the possibility of petrochemical sanctions against the old South Africa. Essentially, Sasol used South Africa’s enormous coal reserves to generate about one third of its fuel requirements. Subsequently, Sasol became involved in the chemical industry which now accounts for about

4Sight

The world has, in the last twenty years, entered what has been characterised as the 4th Industrial Revolution (4IR). It has been described as “... the biggest structural change of the past 250 years — a transformation of scale, scope and complexity unlike anything humankind has experienced before.” In simpler terms, 4IR refers to the digital convergence of

The Great Bull Resumes

On the 12th of June 2023, we published an article, headed "Bull Trend?". In that article we suggested that, after a 25% correction, the great bull market on the S&P500 which began in March 2009 was still intact and would, in time break to a new all-time record high, above the high

CA Sales

In recent years, the JSE has not seen many high-quality, exciting companies listing on the exchange. One of those few is CA Sales Holdings (CAA), which offered both fund managers and private investors an excellent opportunity to make a significant capital gain last year.

CAA is a company which has grown

Two Elections and Two Wars

As the New Year begins, private investors should consider the most important factors which are likely to impact on the prices of shares and the profits of companies listed on the JSE. Some of these factors are local, like the general election which is expected to take place sometime in May, and some are international like the oil price, the