When it comes to equity investing, those looking to follow a buy-and-forget strategy would probably do well to avoid cyclical industries. Many of them don’t offer great through-the-cycle returns and the volatility along the way can be extraordinary. In industries such as mining and paper, it’s all about timing your entry and exit points. Usually, the right approach is to do the exact opposite of what the headlines are suggesting. When times are good and nothing can go wrong, it’s time to sell. Conversely, when everything seems hopeless and no new capital is flowing into that sector, it’s usually time to buckle up and buy.
This strategy clearly isn’t for everyone, especially those who want to enjoy wealth creation without immense stress along the way. The joy of the markets is that there is truly something for everyone out there, including some great choices that should deliver inflation-beating returns over time without sending you to the doctor to increase your blood pressure medication.
In the past week, our local market dished up earnings updates from a few companies that fall into this category. Adding these names to your watch list and doing further research into potential positions could be worthwhile.
We begin with CA Sales Holdings, which got off to a really tough start as a separately listed company, suffering from a major market correction in the aftermath of the pandemic. Since bottoming out at about R5.50 in 2022, it’s been one-way traffic up to the current level of R13.55. The share price performance over the past 12 months is 83% growth, with the year-to-date performance at 19%. Though there was some range-bound trading in the share price for the first few months of 2024, things then picked up again in the GNU-phoria. The company can back it up with earnings growth, with headline earnings per share (HEPS) up between 17% and 22% for the six months to June. As a well-managed business with a highly sensible CEO and a solid combination of organic growth and acquisition opportunities in the fast-moving consumer goods (FMCG) distribution space, CA Sales has made a name for itself on the local market.
Another sector of interest is education, particularly for tertiary opportunities that are typically less capex-intensive than primary and secondary education. Over five years, AdvTech is up 166% and Stadio is up 100%. In the past year, they are up 55% and 10% respectively, with Stadio trading at a premium valuation and being treated as a high-quality stock with limited further room for multiple expansion.
At Stadio, core HEPS (the preferred metric there) increased by between 14% and 24.3% for the six months to June. On a past-12-months basis (by taking the midpoint of this first-half guidance and the second half of the previous financial year), the p:e multiple is 20.2. That’s a demanding multiple, which is why the recent share price growth has been modest. Given the strong management track record at the group and the recent surprise of having the discipline to pay dividends, this feels like a multiple that can be maintained. If that’s the case, then the share price should increase by earnings growth each year, which in this case is in the high teens.
At AdvTech, which is a less focused business than Stadio but still highly successful, HEPS for the six months to June will be up between 13% and 18%. Though that’s a more modest growth rate than Stadio, the share price is trading at a significantly lower multiple. This is why AdvTech shareholders have been smiling broadly over the past year. The p:e multiple calculated on the same basis as Stadio (past-12-months approach) is 16.3. Even after the substantial rally in the past year, AdvTech leaves room for further multiple expansion, whereas Stadio looks fully baked. Both are excellent businesses.
Market-beating returns
Clearly, there are companies on the local market that are capable of generating great returns despite all the challenges of operating in Southern Africa. It all comes down to a combination of business model and the level of focus of the management team, as well as the relative valuation. You may have noticed that I saved the CA Sales Holdings p:e multiple for last. On the same past-12-months basis (which is critical in this case due to seasonality in the FMCG sector), the p:e multiple is 12.9.
It’s no coincidence at all that the best performer in the past year has had the cheapest valuation. High-quality growth at a modest multiple is how you generate market-beating returns.
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