Traders Corner Blog


14 stocks for 2014 (from Face2Face Session 28 Nov 2013)

Posted by: Garth Mackenzie Posted on: 2013-12-05

The final Traders Corner Face2Face Session of 2013 was held last Thursday, 28 November. The evening was well attended at the offices of IG South Africa in Sandton. Thanks to all who attended. We were live Tweeting through the evening and Candice Kropf from @mysocialideas took hold of my Twitter account to create some useful social media engagement. There was lots of engagement on Twitter with hashtag #TCSession.


The theme of the evening was “14 Stocks for 2014”.


As background to next year’s stock picks are a number of expected themes which I highlighted at the start of the evening. These themes are as follows:


(1) Valuations are high and value is hard to find.


With the JSE Overall Index on a PE of around 19.5 currently, the market is expensive relative to the long term average of 14.6. But what is important to note is that the market is fairly fractured in its valuation, and there are pockets of the market that are exceptionally expensive, and pockets that offer some relative value. It is difficult to throw a blanket over the whole market and say the entire market is expensive, but it‘s certainly not cheap in any sectors and value is generally not easy to find. Having said that, I have tried to look for stocks that offer relative value and reasonable earnings growth.


(2) Weakening trend for the rand.


We have seen the rand perform very poorly in 2013. Unfortunately this theme is likely to stay with us in 2014. The recent current account deficit figures prove that we are importing a lot more than we are exporting, and that trend is unlikely to reverse any time soon. The rand will continue to be the shock absorber that reflects that imbalance, and consequently it is likely that the rand will remain on the back foot into 2014. Technically there is a well-defined weakening trend for the rand over the past three years. A break through R10.45/US$ will open further technical weakness. I have tried to focus on stocks that offer either a direct or an indirect rand hedge exposure.


(3) QE tapering will be a developing theme.


There has been much noise made about the fact that the US Fed will be looking to start tapering its monetary stimulus as soon as the US unemployment rate reaches a low enough level (6.5% is the line in the sand). Current consensus is that the Fed will begin tapering gradually from March 2014. This will be a slow and calculated exit from the stimulus measures that have been dominant in the US economy since 2009. The key to note here is that in each of the past 4 years of this bull market, there has been new stimulus injected into the US economy. Next year, the theme will be the withdrawal of stimulus and it is quite possible that this exit may present a headwind to equity markets, in as much as the stimulus has provided a tail wind in recent years. If there is negativity to be felt from this, it will most likely be felt most in emerging markets.


(4) Global economy is on a recovery path


The fact that the US Fed is considering tapering QE is a result of the fact that the US economy is recovering. The rate of recovery is slow, but the momentum is heading in the right direction towards sustained economic growth in the US. When that juggernaut economy gathers momentum, it will drag the rest of the world with it. Europe’s economy is starting to show signs of recovery too. Emerging market economies continue to grow at an above average rate and their contribution to the global economy continues to increase. So all in all, the global economy is heading in the right direction and this should provide an underpin to equity markets globally.


In summary to the above 4 themes, it seems quite likely that we may see the JSE track sideways next year in a choppy fashion, with some volatility along the way. The trend trading strategy that has worked so well in the past two years is less likely to work in 2014 and a different trading strategy will probably need to be adopted in order to capitalize on that different environment (This “changed strategy” will be discussed at the first Face2Face Session of 2014).


In selecting the 14 stocks for 2014, and given the background themes as painted above, I set about identifying 5 stock selection criteria as follows:


(1) Stocks must be showing technical strength and momentum
(2) A leaning towards offshore exposure, either direct or indirect
(3) Stocks must show relative value in an expensive market
(4) Stocks must show decent earnings growth potential with certainty of revenue streams
(5) Diversification across sectors and geographic regions within the portfolio


Based on all of this, the 14 stocks that I have selected as my preference to own for 2014 are as follows:


(1) Aspen Pharmacare (APN) (Industry – healthcare)


This stock has been a stellar performer over recent years. It has embarked on strong international expansion in recent years, with R30 billion worth of new offshore acquisitions over the past two years expected to add R7 billion to revenue to FY15. On a current historic PE of 32 it is not cheap, but that PE does unwind quite quickly in the next two years as earnings growth is expected to come through, and on that basis, it can justify the current high PE. It has solid technical momentum behind it, and any pullbacks towards the long term uptrend at R240.00 will provide a nice entry point into the stock.


(2) AVI (AVI) (Industry – Food Producers and Branded Goods)


This company employs excellent capital management and represents the best value within the food producing sector. It sits on a current historic PE of 17.5 and that unwinds quite quickly with double digit earnings growth expected in the next two years. There is also a healthy 4.6% dividend yield too. What really got me interested here was the lengthy 18-month sideways consolidation in the share price between R55.00 and R62.00. This sideways consolidation has allowed the 5-year uptrend to catch up to the trading action and it looks as if a break above R62.00 is imminent. A break through the overhead resistance at R62.00 will be very bullish and should open potential for a powerful move higher.


(3) BarloWorld (BAW) (Industries – Equipment, Automotive, Logistics)


This company has been showing steady growth over the past 4 years and retains its upward momentum. It trades on a historic PE of 13X and that unwinds towards single digits over the next two years with expected earnings growth in the mid-teens. Current dividend yield is 3%. The R100 level has proved a tough level to break through over the past two years, but the earnings growth projections support the case for a break through the R100 level in the year ahead and that would be very bullish from a technical perspective. One risk here is that the stock is sensitive to mining capex spend, but if we believe in gradual global growth then we should see mining capex gradually expand too. The company has been expanding globally to broaden its offshore revenue generation.


(4) BHP Billiton (BIL) (Industry – Diversified mining)


This is by far and away the best resource stock listed on the JSE, and in my view there is no point in taking on the unnecessary risk of owning any of the other more focussed resource stocks. BHP Billiton offers a great degree of global diversification and also offers tremendous diversification in its product mix. It is well managed and represents reasonable value with a historic PE of 15, with that number unwinding gradually in coming years as earnings growth is expected to filter through. Current dividend yield is 3.6% and the company employs a progressive dividend policy. It has limited exposure to the South African mining sector and it therefore has limited risk exposure to the uncertainties within South African mining. Technically the stock has been climbing steadily over the past 4 years and is now trading close to all-time highs. It exhibits far greater relative strength than the rest of the stocks in the Resources sector and this outperformance is expected to continue.


(5) Bidvest (BVT) (Industry – Industrial goods and services, trading and distribution)


“Proudly Bidvest” is a payoff line that has become familiar to most South Africans. This company is involved in all of our lives in one way or another, and most of the time we are not even aware of it. The company was founded and remains run by entrepreneurial legend Brian Joffe and has expanded aggressively into international markets. 39% of revenue is now generated outside south Africa. The company trades on a historic PE of 16 and a dividend yield of 3%. Double digit earnings growth is forecast in coming years. Technically the stock has been trending steadily higher since 2009 and the earnings growth looks set to support the upward momentum of the share price in 2014.


(6) Richemont (CFR) (Industry – Luxury goods)


This stock has been a phenomenal performer over recent years and is one of the stocks that is skewing the overall high valuation of the JSE. It trades on a PE of 22 which is on the high side, but with a growing number of emerging market millionaires – all characterised by high affinity for luxury items, this company’s earnings growth profile still looks solid and the high PE is forecast to unwind in the next two years as further earnings growth comes through. It is primary listed in Zurich so is a pure rand hedge play. Technically, the upward momentum remains very strong. It has been consolidating under R105.00 for the past few months, but a break above that level is looking likely and this should open further upside for the share price into 2014.


(7) Deutsche Bank EuroStoxx50 ETF (DBXEU) (Offshore ETF - Europe)


I’ve picked two Exchange Traded Funds (ETFs) for next year to enhance the overall global exposure of the portfolio. The DBXEU tracks the EuroStoxx50. This Index tracks the 50 largest stocks in the EuroZone and represents the EuroStoxx50 index in rands. The European market offers better relative value than the JSE currently. The historic PE for the EuroStoxx50 is 16.2X against the JSE’s 19.5X. That PE is also expected to wind down next year as earnings growth among the companies in the Index grow earnings. This is a convenient way to get offshore exposure without sending your money offshore. This ETF trades as a share on the JSE and there is an active market-maker to ensure liquidity in the ETF.


(8) Deutsche Bank USA ETF (DBXUS) (Offshore ETF – USA)


This is the second of the two ETFs in the portfolio. The DBXUS represents the MSCI USA Index of the largest stocks in the US. A number of massive well-known companies like Apple, Microsoft and Google (among others) form part of this index. As mentioned in the introduction, the US economy is starting to gather momentum and when that juggernaut economy gets moving, corporate profitability is likely to improve with it. This is a convenient way to get a diversified exposure to the US market without sending funds offshore. The ETF is a rand denominated representation of the MSCI USA Index and is therefore a pure rand hedge play. There is an active market maker in the DBXUS to ensure liquidity.


(9) Intu Properties (ITU) (UK Listed Property)


This company was born out of the old Liberty International and is a pure play on the UK property market. London and UK property is performing well as an asset class and this stock is a way to get exposure to that. It is also a pure rand hedge play. The stock is not cheap on a PE of 25X with slow earnings growth, but the trading action is what interests me here. It recently broke out above the top of an ascending triangle pattern at R52.50. These are typically bullish continuation patterns within a rising trend. The pattern projects a technical target of R65.00. The current dip back into the R52.50 area looks to be a re-test of the recent breakout level and may be offering a decent entry point.


(10)  Metrofile (MFL) (Document Storage – mid cap)


This is the only mid-cap stock in the portfolio. This company has captured a niche market in electronic document storage and physical file storage. The company’s clients are predominantly financial institutions that require huge amounts of paperwork to be stored safely. What is exciting about this business is its African expansion. With a number of financial institutions expanding into Africa, Metrofile is following its clients up into Africa and setting up business alongside their clients. The risk for Metrofile is therefore low and the potential for growth quite large. The share has strong upward momentum and any retracement back towards the long term uptrend at R4.50 would present a decent entry point.


(11)  Mr Price (MPC) (Retail)


We all know the business of Mr Price well. This has been a stellar performer over recent years. It is the most attractive company in the retail space in my view as it is well positioned to take advantage of the lower to middle income market in South Africa as well as into sub-Saharan Africa. It is predominantly a cash retailer and therefore does not have exposure to the credit problems that a number of other retailers are experiencing lately. On a relative basis, this is by far the strongest stock in the retail sector technically. It has consolidated sideways for the past 18-months and has just recently broken to new all-time highs. Technically this is a bullish development and it can justify further gains. The valuation is not cheap on a PE of 24X, but high double digit growth will see that PE unwind in the next two years. The stock is relatively defensive within the retail space and looks by far the best pick in the sector.


(12)  Reinet (REI) (Investment Holding)


This investment holding company’s predominant asset is its holding in British American Tobacco. The plan is to gradually sell down its stake in BATS and use the proceeds to invest in new businesses. What is attractive about Reinet right now is its deep discount to NAV which is sitting at 33%. As the BATS exposure is gradually wound down, this discount should narrow. BATS is a pure rand hedge play with its primary listing in London, and consequently this makes Reinet a rand hedge play too. The dividend yield is attractive for the year ahead at 4.1%. Technically the chart is showing strong upward momentum and given the significant discount to NAV, that upward momentum should have a fairly solid underpin.


(13)  Rand Merchant Insurance Holdings (RMI) (Insurance)


This company owns sizable stakes in Discovery, Outsurance, MMI and Rand Merchant Bank Structured Insurance. It is an exceptionally well run business with some very solid brands within its stable. It’s a decent dividend payer with the yield currently at 3.6% and climbing. Growth is expected to be steady in the years ahead. Technically the stock has had strong upward momentum since it came to market and the gradual upward trend looks solid.


(14)  Standard Bank (SBK) (Banking)


What excites me about this stock is the fact that it has finally broken through a 7 year resistance at R120.00. This is a very encouraging development from a technical perspective and opens the way for further gains in the year(s) ahead. The company recently announced plans to divest of its offshore operations (basically its London business). It will retain a small stake in that business but will bring the majority of the capital back to African shores and use it to fund African expansion. This is far more exciting than the offshore business which has been heavily capital intensive and has delivered sub-par returns. On a PE of just less than 12 and earnings growth expected to be in the mid-teens, this looks like compelling value to go with a technical outlook that is very encouraging.


I have shown screen shots of each of the slides used in the Face2Face session on 28 November 2013.


I will be running these Face2Face Sessions on a monthly basis in Johannesburg on the last Thursday of every month. I  will also try to make a bi-annual appearance in Durban and Cape Town. The first Face2Face Session for 2014 will be held on 30 January 2014. Bookings for the next Face2Face Session can be made here:


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