Monday, February 4, 2008

Our yearly model portfolio for 2008

Finally, our 2008 model portfolio is revealed! Before we go into the make-up of our portfolio, let us remind investors of our rigorous investment process:

1. We conduct an analysis of the global politics and economy.
2. We analyse the South African politics and its economic prospects.
3. We evaluate the prospects of major industries in South Africa.
4. We decide on the industries we should consider to be included in our portfolio.
5. Shortlist companies we should consider. These companies generally have low PE ratios and good prospects.
6. Conduct a fundamental analysis on each company in the shortlist.
7. Place a value on the company using our proprietary valuation model.
8. Conduct a technical analysis on each company in the shortlist.
9. Decide on the individual stocks to be included in the portfolio and their weightings.

There are 12 shares in our 2008 portfolio (in brackets are the closing prices of 31/12/2007):

1. Datacentrix (R4.79) - Datacentrix is an IT solutions company. It has been growing steadily since the 2000 dot com bubble burst. There has been a recovery in IT spend, and the economic growth in South Africa should continue to increase the demand for IT solutions offered by Datacentrix over the next 3 to 5 years.

2. Famous Brands (R19.50) - Famous Brands manages and develops well-known fast food brands such as Wimpy, Steers, Debonairs, Fish Aways and Brazilian Coffees. Due to lifestyle changes and the emerging black middle class' increasing acceptance of Western fast food, Famous Brands should continue to grow on the back of increased market demand. In addition, Famous Brands is expanding internationally, with its UK acquisition showing signs of success. Its international expansion strategy will add scope to its profit growth in the future.

3. Iliad (R14.79) - Iliad is a mid-sized wholesaler and distributore of building materials. It has been on an acquisition trail over the last few years, consolidating the fragmanted building supplies industry. It has grown successfully, and it should continue to benefit from the strond demand for building supplies from the infrastructural spend.

4. Pinnacle (R4.76) - Pinnacle is a successful manufacturer and distributor of advanced ITC equipment. It manufactures and sells the Proline brand of PCs and notebooks. Pinnacle has a good growth strategy, and with the assistance of its BEE partner, it should continue to grow quickly over the next few years.

5. Standard Bank (R100.08) - One of the Big Four banks, it announced a deal with the Industrial and Commercial Bank of China last year. The deal should help Standard Bank grow its presence in select emerging markets, thus positive for its future earnings.

6. ABSA (R111.00) - Also one of the Big Four banks, its share price has languished due to the effect of the US subprime crisis on the banking industry worldwide (despite ABSA having little exposure to the subprime risks), as well as the anticipated increased bad debts in the current high interest rate environment. However, its share price has fallend significantly, and we believe it now offers value.

7. DAWN (R17.50) - Distribution and Warehouse Network is a manufacturer and distributor of building supplies. It has grown quickly over the last few years, with presence in many African countries. Its excellent logistics system is its competitive advantage. It came first in last year's Sunday Times Top 100 Companies.

8. Northern Platinum (R40.06) - Northam is a smaller Platinum miner, with mines in the North West and Limpopo provinces. Because of defficulties in mining the ore body, safety related stoppages, as well as electricity load shedding, its production is going to be lower compared to last year. This should somewhat be compensated by the historical high platinum price and a weakening rand.

9. Steinhoff (R19.40) - Steinhoff is an international manufacturer and distributor of quality furniture. It produces furniture in low-cost markets such as Eastern Europe, then sells them in developed countries such as the Western Europe, Australia and New Zealand. They are expanding into the Asian markets. There is room for them to grow over the next few years. However, investors have been selling its shares because of fears of the slowing global economy hurting demand for durable goods such as furniture. At the current price of R16, we believe it is an excellent opportunity to acquire the shares in an excellent business cheaply.

10. Foschini (R48.30) - The Foschini Group owns over 1,200 well-known brand stores such as Foschini, Markhams, Totalsport, !Exact, American Swiss and @Home. It retails fashion, jewellery, accesories, sports equipment, outdoor equipment and lifestyle goods. Due to high interest rates, reduced disposable income of the consumers and a slowing South African economy, its turnover this year is likely to be lower than last year's in real terms. However, with the PE currently at around 7, and its high dividend yield, we rate this company a "buy".

11. Goldfields (R99.00) - Goldfields is the second largest gold mining company in South Africa, and one of the top 10 gold miners in the world. Over the last few years its production in South Africa has been declining; coupled with increasing operating costs, Goldfields has struggled to increase profits. What is in its favour are the rampant gold price, as well as the weakening rand. In addition, Goldfields has its eyes on China: It has formed an alliance with Sina Gold, in order to diversify its mining assets geographically. This should benefit Goldfields in the near term.

12. Lewis (R45.95) - Lewis Group has more than 500 stores in Southern Africa, selling furniture, household appliances and consumer electronics to the low- and middle-income segment of the market. Like the Foschini Group, it is negatively impacted by high interest rates and reduced purchasing power of the consumers. However, its share price is at a PE ratio of less than 7, which starts to offer value.

Happy Investing!

1 comment: said...

Very interesting top-down (as opposed, for example, Allan Gray's bottom-up) method for portfolio construction.
Although I focus on small caps (, its always interesting to read anothers approach to investment decisions.
Kind regards,