The end of 2023 is upon us. We are now in December; possibly even Dezemba if South Africans can find enough coins between the couch cushions to have some fun. Even if we are struggling as a nation to find spare cash to enjoy ourselves, there is no shortage of activity on our shores. All indications are that we are in for an excellent season of inbound tourism, helped by the weak rand. That’s good news not just for the hotel groups, but also for the likes of Zeda as a car rental business.
December is a time for reflection. Inevitably, much of what you read over the next few weeks will be a review of the year. For many investors, there were hard lessons about the importance of doing proper research before taking single-stock exposure. If low interest rates became the rising tide that lifted all boats, then rapidly increasing rates were the icebergs that sank many of them. Some big names and popular stocks were given a hiding by the market, buckling under the macroeconomic pressures.
There were examples of share prices that simply marched on, irrespective of relatively demanding valuations vs peers. This year, it took a high-quality company to deliver solid returns to shareholders off a lofty valuation base. The obvious example is Shoprite, which has crushed the competition and has achieved year-to-date share price growth of more than 11%. It wasn’t all smooth sailing though, as even Shoprite isn’t immune to the volatility that is a feature of an emerging market such as South Africa. The 52-week high is R266.59 and the 52-week low is R191.65. The former is 39% above the latter. Considering that Shoprite is easily the most important retailer on the continent with a market cap of R150bn, that kind of volatility is just incredible.
Shoprite is an unusual case of a richly valued stock that worked out well this year. Most of them didn’t
Shoprite is an unusual case of a richly valued stock that worked out well this year. Most of them didn’t. The reason for Shoprite bucking the trend is that the company has put in a watershed performance, winning market share and leaving arch-rival Pick n Pay for dead. Spar did a great job of dropping a grenade on its own business, which made it a lot easier for Shoprite. Woolworths is a more niche player in grocery and still couldn’t keep up with Shoprite even in its own target market, with the historically untouchable pricing power of Woolworths now under siege.
The lesson here is that if you’re going to buy at a high multiple, then the company absolutely has to keep delivering on expectations. When a hero falters, market retribution is swift. A quick look at a Bidvest share price chart will confirm that. In mid-November, Bidvest was trading at more than R284 a share, having started the year at R216. Investors were up more than 30%, at least until the release of an announcement about trading conditions for the first four months of the new financial year.
With Bidvest talking about a slowdown in performance and difficulties in maintaining gross margins, the market panicked and slashed the price to R235 a share. Though investors are still up for the year, those juicy gains have been reduced to an unexciting return of less than 9%. It’s better than the market, but not better than what bonds are paying.
Investors with more of a value-tilt tend to avoid the heroes. The argument is that even Shoprite’s return this year is not exactly life-changing, yet so much had to go right in the business to achieve it. There’s little or no margin for error, which creates a symmetrical potential return profile. In other words, it’s practically a coin toss in terms of potential share price performance up or down, which is unpalatable when fixed income opportunities are paying juicy rates.
Instead, value investors look for the low valuation multiples and businesses that have a decent chance of at least keeping it together or perhaps giving the market a positive surprise. These are the valuation dislocations that value investors dream of, though of course it isn’t easy to distinguish between a cheap good company and a “cheap” bad company, with the latter commonly called a value trap.
Does the strategy work? Well, it sure can. Nobody is talking about Truworths as a terrific retailer (with good reason), yet the share price is up 36% this year. That’s more than three times better than Shoprite, the hero of the sector.
If there’s only one takeaway from 2023 it is this: valuations always matter.
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