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SHARE WATCH: Value for patient investors

Oct 10 2015 10:00
*Kirk Swart


Company Data

Sasol Limited [JSE:SOL]

Last traded 215
Change -12
% Change -5
Cumulative volume 1214608
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA


Last traded 160
Change -3
% Change -2
Cumulative volume 998887
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA


Last traded 104
Change 0
% Change 0
Cumulative volume 130987
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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Cape Town - Investing is a field that is plagued by human emotion. I can’t think of any other field that is so exposed to the herd mentality, or the bandwagon, than the field of investing, says Overberg Asset Management analyst Kirk Swart.

"Every week analysts need to adjust their predictions as the latest information is screened across their computers. All this is done in the short term.

"This week places the focus on shares that the market has priced down in the short term but is likely to provide good long-term returns for the patient investor."

1. Liberty Holdings [JSE:LBH]

Liberty Holdings came off its highs of R174.98 in April 2015 and is currently trading at around R130 per share. This is a drop in share price of just under 30%.

The drop in price is due to the lacklustre growth in earnings from Liberty's Health divisions which management flagged as Liberty's next growth engine. This drove the negative sentiment towards Liberty's share price.

However, the Health divisions are still a small part of Liberty's total business. Their core business, the Retail Life Insurance business, is doing very well with premium revenue increasing very steadily and distributions increasing.

Trading at a price to earnings multiple of 8 most of the negative sentiment have already been priced into the share price. Thus when you buy Liberty at R130 you buy a business that has increased its core earnings consistently and is likely to continue to do so.

2. Sasol [JSE:SOL]

Sasol's share price is seen as a proxy for the ZAR/USD oil price. Since the oil price started falling late last year so has Sasol's share price. The Sasol share price dropped to as low as R360 in January 2015 when analysts were predicting the price of Brent crude could go as low as $20 bbl.

A big driver of the low commodity prices we are seeing currently is the strong dollar. For Sasol, a strong dollar is somewhat of a curse as well as a blessing, as a strong dollar will lead to a drop in the dollar price of oil but will also lead to a gain on the currency side.

It all depends on which force is the strongest. Currently, Sasol is trading at around R430 per share and a price earnings of around 8. With Sasol's earnings likely to be under pressure for the foreseeable future, the share price is probably justified.

However, the strong dollar won't persist indefinitely and so won't low oil prices. In Sasol's defence, they are growing their chemical business which is not as oil price dependent as their traditional synfuels business.

3. Standard Bank [JSE:SBK]

In April 2015, Standard Bank reached a high of R175 per share. It has since then pulled back to test lows of around R130 in September and is currently trading at R140 per share.

Standard Bank has recently been named the most innovative investment bank in Africa and as the largest banking group in Africa by assets, should continue to grow revenue for the foreseeable future. At R140, it is trading at a price to earnings ratio of 12.

The South African banking sector is offering good value and with Standard Bank trading on a 12 price to earnings ratio, it is representing a discount to the market of over 30%.

4. JP Morgan Chase [NYSE: JPM]

JP Morgan Chase is one of America's most successful banks. It offers a wide range of services to retail customers and institutions. Their expertise ranges from commercial banking, wealth management and retail investment services to big institutional investment banking.

JP Morgan Chase's share price came down from $70 in July to a low of $59 in September after the Chinese announced their currency devaluation in August.

A fear of the impact of a Chinese slowdown on world stock markets have left analysts bearish on JP Morgan's revenue going forward. The news left JP Morgan on a price to earnings ratio of 10.

A lot of JP Morgan's revenue still comes from traditional bank lending practices. With the US moving into an interest rate hiking cycle, JP Morgan Chase is set to take advantage of it.

5. Volkswagen [VOW:GR]

In March of this year, Volkswagen's share price traded just over €250 per share. Since then, sentiment towards the overall market has turned negative leading to a price decline of €80 to around €170.

Today it is trading at a low of €120 after it was revealed that Volkswagen cheated on their diesel emissions in the US. When the news broke, some analysts predicted that the scandal can put Volkswagen out of business.

At historical earnings, a price of €120 places Volkswagen on a price to earnings valuation of 5.  

The new CEO, Matthias Mueller, will no doubt use this opportunity to restructure the company to be more decentralised, efficient, and will be cutting costs where he possibly can to increase the profit margins. Volkswagen's profit margin was low before the scandal broke.

Although more short to medium term downside is very much a possibility, Volkswagen may well emerge stronger and much more profitable.     

Do you agree with Kirk's stock picks? Send us yours and tell us why.

* Kirk Swart is an analyst at Overberg Asset Management, an Authorised Financial Services Provider (No 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer: The above article does not constitute financial advice and is not a recommendation. Investors must always seek the advice of professionals and trade with caution. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.



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