Any analysis starting and ending with a particular date, whether spanning a year, three years or five years, will be open to criticism. This includes the lists of the best and worst performers that market commentators like to compile at the end of every year. Share prices simply do not follow the calendar like humans do.
A similar list of share performances since the start of the year would show Massmart to be the worst with its drop of 55%, followed by Netcare and Discovery, which both lost around 35% since the JSE reopened for trading after the New Year weekend.
The best on this particular list are still the platinum companies, with AB InBev next after posting a return of more than 57%.
It would take much more analysis to determine whether a share had just started a severe down trend when any list shows a price 25% lower than a year ago. For instance, British American Tobacco is 25% lower than a year ago (R563 compared to R756) and more than 40% down from its high of nearly R1 000 per share in 2016, but is probably recovering.
Pick n Pay is also generally seen as a recovery stock, as is Adcock Ingram. Many an investor hopes that PPC is on the list as well.
Sun International’s management is trying to convince investors that the company is in recovery mode, while investors are waiting for the right moment to pile into Sasol for a strong recovery similar to that of platinum counters over the last few years.
On the other hand, it looks like investors are not betting that the strong run in commodity shares will continue and most fell back from recent highs despite the weak rand and strong commodity prices. The reason for this is probably the start to wage negotiations that will probably turn out to be very challenging this year, given the good results lying at the centre of the negotiating table.
A look at profit forecasts and comparing the historic price-earnings ratio (PE) to the forward PE will probably give a better indication of which shares offer recovery potential – if the forecasts are fairly accurate and investors act rationally.
Forecasts collected by Bloomberg from analysts at stockbrokers and asset managers show that investors are expecting strong earnings growth at several companies that have had a bit of bad luck recently.
Figures suggest that investors are happy to buy MTN at the current R104 per share on a PE of a high 34 times, which translates to a low forward PE of 14 times a year. The figures also show that investors expect continued profit growth from gold and platinum mines, notwithstanding the recent slight drop in share prices.
A few shares stand out when looking at the forward PE.
Consensus forecasts put Aspen on a forward PE of a low 4.5, which shows the extent to which the share dropped in shareholders’ estimation.
Bank shares also look cheap when comparing their forward PE ratios with their ratings over the last few years, probably due to the uncertainties about changes to legislation, the general economic outlook, and SA’s troublesome debt ratings.
Banks are all on forward PE ratios of less than 10, except for Capitec. Capitec’s share price reflects a forward PE of close to 20 times as investors are apparently still seeing strong growth for the next few years. In contrast, Absa’s share price represents a forward PE of less than 7 times based on Bloomberg consensus estimates.
Most interesting is that the few analysts who still bother to follow the building and construction sector are seeing an upturn in the prospects of the construction companies that survived the difficulties in the sector during the last few years.
However, any significant upturn in share prices overall would require at least a bit of economic growth, certainty in government policy and improved investor confidence.
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