'Get real on investment growth'

Johannesburg - Naspers [JSE:NPN], Capitec Bank Holdings [JSE:CPI] and Aspen Pharmacare Holdings [JSE:APN] have all been investor favourites over the past few years, but backing the current crop of top performers is not necessarily a recipe for success.
 
This is according to Cannon Asset Managers CEO Geoff Blount, who said investors expecting high growth stocks to continue delivering earnings at a superior rate are bound to be disappointed.
 
All three companies have had a spectacular five-year period. Capitec has returned 790% over the period (excluding dividends), Aspen delivered 240% while Naspers has risen 270% and is being tipped for further growth.
 
"Time and again, investors' high expectations of growth stocks are met with disappointment.  By contrast, it is the unloved, out of favour, low price-earnings stocks that actually grow earnings ahead of the market," Blount said.
 
Blount points to a recent survey of 10 000 global stocks over a 35-year period. The study examined two aspects of investment results: the relationship between price to earnings (PE) ratios and investment returns, as well as the relationship between investment returns and earnings growth.
 
The survey showed two interesting facts.

Learn to look out of the box
 
"First, stocks on high price-earnings ratios, that is growth stocks, underperform the market. By contrast, unloved value stocks on low price-earnings ratios outperform the market," he said.

The second factor is that growth stocks experience earnings growth that is slower than the market, and out-of-favour value stocks surprise by delivering faster-than-market-earnings growth.
 
An example of a high growth stock which has subsequently fallen out of favour is Grindrod [JSE:GND]. The stock saw rapid appreciation, moving from 800c a share in May 2005 to hit an all-time high of 2 852c in May 2008. By mid-2010, the stock had halved and was trading at around 1 400c a share.
 
A more recent example of an unloved stock producing exceptional returns is Old Mutual [JSE:OML]. While shares were being sold heavily and hitting a low of 461c in April 2009, they tripled in value to 1 506c six months later.

"Portfolios of value shares require patience and the emotional willingness to look at things in a way that is different to the market, as well as accepting a different shape of performance to the crowd," said Blount. "That is something most investors do not have the ability to stomach."
 
Shares which have been added to the Cannon Equity Fund over the first half of 2010 include resource giant Anglo American [JSE:AGL], Sasol [JSE:SOL] and  Nedbank Group [JSE:NED].
 
 - Fin24.com