BUY: Shoprite
Shoprite’s share price has risen only slightly over the past year, while growth has held up well. This means there has been a meaningful derating in the share price. We view this stock as a high-quality growth company that investors can now buy at a decent valuation to hold over the long term.
First-half results to the end of December were solid despite the business navigating an exceptionally challenging low-inflation environment. Trading margins held steady, despite the compression in gross margin that stemmed from the deliberate pricing strategy of supporting affordability for customers. The interim dividend was lifted materially, reflecting management’s confidence in the sustainability of earnings growth and the robust cash-generation profile. The business’s medium-term growth prospects look decent and could receive a short-term kick from potentially higher food inflation (due to the second-round effects of higher fuel prices).
Technically, the price is consolidating in a well-defined triangle pattern, with repeated tests of the 200-day moving average confirming a key support zone. Recent price action has been encouraging. We are now looking for a sustained move above the triangle pattern resistance (about R290) that will signal a potential continuation of the longer-term bullish trend.
SELL: Sasol
Sasol’s share price was up more than 50% in March, helped by energy prices moving meaningfully higher since the US invasion of Iran and the consequent fallout. Despite a shaky ceasefire, the closure of the Strait of Hormuz upended the flow and supply of a large portion of the world’s crude oil requirements. Market movements like these bring opportunities to buy companies at less expensive levels, but also offer an opportunity to sell out of holdings that may have benefited from a temporary dislocation, in this case energy markets.
From a longer-term perspective, Sasol is not a share we would like to hold, and we see the recent price action as an opportunity to sell. Of course, the share price can still run further (and rebound from the ceasefire sell-off) if oil prices remain higher for longer. We do not, however, believe that “fear of missing out” is a good enough reason to hold on to a low-quality stock.
The technicals also support selling the share — Sasol’s recent breakout was not supported by a sustainable trend structure. Cautious holders can keep an eye on the relative strength index (RSI), which has moved back to neutral levels now but has indicated frequent periods of the stock being overbought in recent history.
