Monday, March 19, 2007

Sasol - Oversold on weekly chart

Since closing at an all-time high of R278.80 in June 2006, Sasol's share price has been declining steadily to close at R215 last Friday. While the proposed windfall tax certainly weighs on its share price, it is now oversold on both the daily and weekly chart.

Fundamentally, Sasol is trading at a PE of less than 10. With an increasing demand for its Gas-to-liquids and Coal-to-fuels technologies, its business prospects are excellent, and many years of growth are expected.

We believe it now offers a good buying opportunity for both traders and investors. The short-term price target is R250.

Are we near the end of the current shake-up?

Over the last two weeks the stock markets worldwide have been very volatile. It was first triggered by the Chinese stock market falling 9% in one day, then by the nervousness in the US about the fallout in its sub-prime lending market. Our own JSE has seen days with more than 2% or 600 points movements in the Index.

The question on every investor's mind is: Is the worst over, or still more downside to come?
Consider the following:
  1. The loose lending practice in the US shows up the banks in the now higher interest rate environment, as many lower income home owners cannot afford the instalments. Banks repossess these houses, forcing home owners to vacate their properties. It is estimated up to 1 million home owners face such fate. This is bound to have social and economical ripple effect in the US.
  2. Inflation continues to be a concern. The oil price hovers around $60 per barrel; climate changes cause droughts in many parts of South Africa, hurting crop output. Maize prices are rising rapidly, which will impact other food prices. Higher inflation is likely to lead to further interest rate hikes by the Reserve Bank. As we know, higher interest rates are generally bad for the stock markets.
  3. Geopolitical problems: Iraq, Israel-Palestinian, Zimbabwe, and ongoing terrorist threats. These risks have not been priced into the valuations of stock markets.
  4. Trade imbalances and carry trades: A lot has been writtten about trade imbalances and carry trades. The US runs huge fiscal and trade deficits, while China has big trade surpluses, flooding its economy and stock markets with cash. The low interest rate in Japan has made carry trades a worthwhile, profitable transaction, increasing money flows into global stock markets. If not properly managed, these imbalances may cause disruptions to the world economy and negative consequences to the stock markets.
  5. An article we published at the beginning of the year suggests the JSE is in expensive territory, and more volatilities and downside are likely.

Given the reasons above, we expect the JSE to move sideways or down for at least the next couple of months, if not longer.

Accordingly, traders should trade with lots of caution. Investors should be patient in sitting out the volatilities.

Monday, March 5, 2007

Buying opportunities in a plummeting market

Over the last few days the JSE, in sync with the world markets, has fallen sharply from its all-time high. The All Share Index, having reached 26,932 on 26 February, fell 7.5% to close 24,919 today. The Top 40 index fell from 24,284 on 26 February to close 22,416 today. The market has given back all its gains this year.

Keen readers of this blog may remember that, in early January, I published an article titled “At what level should the JSE Alsi index be?” I mentioned in that article the JSE is some 30% to 48% overvalued. I believe that, even after the current pullback, the market is still very overvalued, and another 10% to 20% decline would not surprise me.

But it is time like this, when panic selling forces prices of all stocks down, great buying opportunities start to present themselves. Undervalued companies become even more undervalued, and smart investors will buy more of these companies.

Right now, we find the following companies on our watch list offering value:

BHP Billiton - the Chinese growth story is not reversing, so prospects for Billiton are good. At a PE of around 9, it is a buy at or below R140.

Telkom - High dividend yield, low PE, growing earnings.

Astral Foods - has pulled back sharply, now trading at below 8 times PE. Also high dividend yield, this one is a gem.

Metrofile - buy at R1.25 or lower.

Sasol - strong support level at R220, its fundamentals are sound.

PSG - buy at R25 or lower.

Sunday, March 4, 2007

Past newsletters to be added to this blog

In the next month or so, I will be adding the newsletters I have published since 2002 to this blog. The purpose is two-fold:

- to allow investors to view and search all our past newsletters; and
- for investors to see the track record of investment advice provided by us.

As always, your comments and suggestions are welcome.

Saturday, March 3, 2007

Rand currency futures

In his budget speech last week, Finance Minister Trevor Manuel introduced the establishment of rand currency futures. Finance Minister said the rand currency futures market would “deepen SA’s financial markets and increase liquidity in the local foreign exchange market”.

THE potential market for a rand currency futures platform in SA is huge, given how large the foreignexchange market is. Not only will the JSE’s new market provide a single forum in which currency exposure could be hedged, it will enable individual investors to take a punt on rand movements.

The rand futures market will operate on Yield-X, the JSE’s interest rate exchange.

Traders, get ready to trade the Rand futures! With the Rand's notorious volatility, it will provide seasoned traders many opportunities to profit.

The resources sector and China's game plan

Clem Sunter, a world-renowned scenario planner and strategist, recently shared China's game plan in the world economy.

According to Sunter there are four players in the Chinese game. "The West - with its brands and technologies as well as its markets; the developing countries - supplying raw materials; the Communist Party - effectively the management team of China; and Chinese citizens - who are the hardest working, most dedicated people in the world."

China has the ambition of becoming the world's largest economy by 2040.

The full story is at Fin24.

This means the demand for base metals and raw materials by the Chinese will continue to grow, and this is positive for the outlook of metals prices, gas and oil.

Did I hear Billiton and Sasol screaming loudly, "Buy me, buy me?"

Friday, March 2, 2007

South Ocean - an update

I called South Ocean and spoke to the Financial Director, Koos Bekker, to obtain more information on the company. Based on our discussions, the company is currently trading at a PE of around 15. It is looking to increase the revenue by about 10% this year. In terms of profits, it will very much depend on the copper price, which affects the input costs.

While this is a solid company in operation for many years, investors should wait until the price falls to R5 - R5.50 before investing in the company.

Alert Steel debuts on the JSE

Newly listed Alert Steel targets diversified growth in construction industry.

Shares in Alert Steel Holdings Limited (Alert Steel), which listed today on Altx, began trading at 159 cents per share, a premium of 59% to the 100 cents per share price at which the shares were placed with institutions during a private placement ahead of listing.

To read the full story, visit Moneyweb.

Insitutions that participated in the private placement are already in the money. This company seems to have a solid track record and good growth prospects. However, at R1.59 and forward PE of 14, it is pricey. For traders, wait for the price to fall to R1.10 to R1.20 before getting in. For investors, wait for the next couple of sets of financial results