Monday, February 25, 2008

Many shares present significant value

The stock markets have the ability to misprice shares. Some shares are priced too highly, while some shares are priced too cheaply from time to time.

An example is the retail sector of the JSE. Just a year ago shares like JD Group, Lewis and Foschini continued to make historical highs and were trading between 12 and 15 times PE. At that time, they were some of the darlings of the investors, and their share prices were buoyed by investors' optimism.

However, a year later, their share prices have relinquished, due to the impact of the high interest rates on consumer spending and the gloomy outlook for the retail sector. JD Group at one stage fell 66% from its high of R106, while other retail companies fell between 50% and 60% from last year's highs. Right now they are dumped by investors, and their share prices are depressed by investors' pessimism. Their historic PE's have fallen to between 6 and 8, a level last seen in 2002 - 2003.

I reckon selected retail shares have fallen so much that they now off value to investors. Sure, consumer spending is curbed in the high inflation, high interest rate environment, and the Eskom power crisis doesn't help either. However, the markets have already discounted all the bad news, these retail shares are more likely to go up than down.

Other shares we consider to offer value at the moment are:

ABSA - the results were announced last week, showing banks' earnings are still very solid
Standard Bank - very positive trading statement, will still continue to grow
Grindrod - a solid shipping company, is growing strongly into the financial services sphere
Naspers - has fallen significantly from R200 to the current R145. Its aggresive but successful acquisition strategy will ensure growth in its chosen offshore markets.

3 comments:

Craig M said...

I was searching google looking for a blog that deals with comment on local shares. There are not many around, which is why I started www.sharetips.co.za a few months back. I just started a monthly newsletter and if you would like to subscribe, please visit my site, perhaps you can blog and refer back to it?
Craig M

Luigi said...

Yo, its "the governor", my comment on the following

"I reckon selected retail shares have fallen so much that they now off value to investors. Sure, consumer spending is curbed in the high inflation, high interest rate environment, and the Eskom power crisis doesn't help either. However, the markets have already discounted all the bad news, these retail shares are more likely to go up than down."

You are very very mistaken thinking that the markets have abosorbed all the bad news. Retail shares are very sensitive to the oil price as well as the interest rate environment. Saying that, and admitting that none of us really know (except you guys offcourse) where the oil and interest rate top end is, I think that your investors (including you) should hold on to the cash you have or wait another 3 months before going into retail stocks and then re-accessing the economic environment. See me at http://sastockmarket.blogspot.com, look out for articles with the alias "the governor".

Kevin Yeh said...

Hi Luigi, many thanks for your comment. In retrospect, I agree that the economic downturn is worse than I expected, the market has proved me wrong in the short-term, and I agree that at the moment it's better to hold on to cash until at least close to year-end.