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The big question on every investor’s mind is how to find the next Capitec*, that investment that goes to the moon and beyond. Having listed in 2002 at 200c, Capitec now trades at around R700, so it’s possibly the best JSE investment in the past 15 years.
Typically, when we’re on the lookout for that next amazing stock, we head off to find new technologies being offered by small start-up businesses taking on entirely new challenges. But usually these new businesses fail. Often, it is not good to be a first mover; the company is on its own and trying untested ideas – while they may have potential, it’s incredibly tough to be a pioneer in a completely new industry. There is no track record to follow and potential customers must first be convinced that this new product or service is something they need. Further, first-generation products are usually buggy and complicated as users essentially act as beta testers.
Now, sure, there are exceptions, Amazon being the one true first mover that became successful. But others such as Tesla and Solar City (now part of Tesla) were not first movers. They were early movers but a lot of the initial groundwork had already been laid by others who failed.
So, rather than trying to find the next huge winners in new spaces, we’re much better served trying to find them in existing boring spaces and banking is a perfect example. Banking has been around forever and little has changed. Technologies that changed banking include credit cards in the 1970s, ATMs in the 1980s and online banking in the early 2000s, but they did not alter the very core of the industry. These changes just affected how customers interacted with their banks. Banking is the same as it always has been – boring, but critical to the functioning of society.
The disruption from Capitec was based on price and convenience. Everybody has a bank account or six, despite the fact that we all feel the service is sloppy at best and that the charges are excessive. But yet we will all die with a handful of bank accounts.
Capitec with no legacy systems came along and did it differently, offering cheap services and branches that are open at times that are convenient for their customers. (If you’re old enough you’ll remember banks being closed on Wednesday afternoons!)
Without legacy systems hindering it, Capitec’s cost-to-income ratio is around 35% and while it may rise, the figures for the big banks are at around 55% and not dropping. In other words, for every 100c in income earned, Capitec makes 20c more than the big banks. This is in large part their secret sauce with everything centralised and computerised.
So, when looking for the next Capitec we need to look less at new technologies and hope we pick the right winner. Rather look at boring, staid industries that have new entrants doing it better and cheaper.
Amazon is a perfect example – the company just sells things and people have been doing that forever, but what the e-commerce giant did differently was that it stocked everything and delivered everywhere cheaply (and still does).
Taking this into account, Discovery* is one I like. Medical aid has been around for ages; we all have it and we all feel we’re being ripped off. Discovery is trying to change that and its winning strategy is Vitality. Using this reward programme, Discovery knows exactly who you are and how healthy you are. The programme encourages clients to be healthy, thereby reducing the number of claims they make and increasing profits.
Discovery’s move into banking is going to be interesting to watch. It will also have no legacy systems and will be able to innovate and cross-sell to existing customers.
Look for new companies doing old things in better ways; they have great potential to be the next winner.
*The writer owns shares in Capitec and Discovery.
This article originally appeared in the 23 February edition of finweek. Buy and download the magazine here.
