You own companies

“Stocks go up and down, in the end it is only the great companies that drive the levels of the overall market. For instance Aspen once traded at 5 or 6 Rand, I remember, as did Famous Brands, Steinhoff was 20 Rand a share not so long ago. Equally Anglo was under 100 Rand in May of 2003, I remember it well, by June 2008 the share price was around 540 Rand a share, It is now 145 odd Rand a share. In London it is down 14 percent in a decade and a half. The market consists of different companies doing different things, it is not a single beast”


To market to market to buy a fat pig. The concerns around the relative health of the Chinese economy persists, this time export and import data this morning are not the right flavour for those suggesting that China is just OK. I guess it is, and perspective is badly needed at this time. Paul tweeted yesterday: “China will grow at around 7% for next 5 years, said Finance Minister Lou Jiwei. Pretty good, if you ask me.”, with the link: China economy enters ‘new normal’ eyeing 7% growth rate: G20. Yes, that is pretty good. That is excellent in fact.

Even if the Chinese economy grows at five percent per annum for the next five years, that is still an enormous number added to global GDP, an economy roughly the size of the United Kingdom. I think that people don’t realise the size and scale of the present economy and how quick growth rates off an increased base is harder and harder to achieve. If they achieve 7 percent growth over the next five years, then the country would have added an economy of somewhere in-between Japan and Germany, the 4th and 5th biggest economies on the planet.

Are you starting to see the size and scale and the very magnitude of what is happening here? Equally if the whole globe grows at three percent per annum for the next five years, it adds a collective 12.3 trillion Dollars in annual GDP. Bigger than China is currently. If it is 2.5 percent, which I certainly think is achievable, then it is equal to the Chinese economy right now. Nobody would ever turn around and say, gee, we added a whole China over the last five years in economic output.

Anyhow, eye popping numbers aside, let us have a look at the scoreboard in Jozi, Jozi yesterday. It was a bleak day, collectively stocks were down half a percent, the only spot of excitement was the debt reduction plan of Glencore, suspending the dividend for the balance of this year and next year, selling assets, slowing down on current spend and most importantly for the market, a rights issue of 2.5 billion Dollars. That is pretty huge, and as far as my reading leads me to believe, management and Glencore staffers will be involved to the tune of 22 percent, the rest is underwritten by Citigroup and Morgan Stanley.

The WSJ article: Glencore Scraps Dividends, Raises Cash to Cut Debt quotes the CFO Steve Kalmin as saying that this is about making this business bulletproof and robust. The share price rallied on the day, up 7 percent in London. The stock is however, and strap yourself in, still down 35 percent over the last month, that is in Pound Sterling terms. Year to date it looks like a train wreck, down nearly 56 percent in Pound Sterling. I remember when Glencore was supposed to be solid, as a result of their trading business which has no commodity price variance.

Almost in the same way that Kinder Morgan Inc. has, a yield of 6.37 percent in Dollar terms at these levels. Huh? And forward, the dividend is said to be 2 Dollars a share. The company transports gas and CO2, it has storage terminals and other product pipelines. So what is Mr. Market telling you here? Richard Kinder, the cofounder and executive chairman gets paid one Dollar per annum, no stock options and no perks, nothing, check out his Reuters basic compensation. Only his dividend.

He did buy around 3,9 million Dollars worth of shares the other day, in July, at 30 percent higher than where the share price is now. He owns (after that transaction) 234,012,353 shares. If the dividend is two Dollars, as the company suggested, he gets 468 million Dollars before dividend tax. Even at the top end rate, he still gets to keep 60 percent of that free and clear. So do not feel sorry for him. Perhaps this is a case of storms on the horizon, why would Richard Kinder shell out around 4 million Dollars around two months ago? He obviously still believes in his business and thought at the time it was oversold.


I want to highlight an email conversation that I had with someone yesterday. Remembering two things, one, if you are invested in single stocks that means that you do not own the market or the index and two, the index is made up of companies that dynamically change places in the ALSI 40 as a function of their prospects and market participants pricing that future accordingly. For instance, take some of the single commodity stocks, the companies that mine one specific group of metal, their price action can be very volatile as a result of the underlying price. Over five years Kumba Iron Ore is down 75 percent, the price that is. Production is up sharply, the iron ore price in that time has moved around wildly. At the beginning of 2013 the stock topped out at 611 Rand a share, currently it is 86 Rand, the lowest level since the split of Kumba Resources.

In 2011 the company paid 42 Rand a share in dividends, almost exactly the same in 2012, in 2013 it was nearly 33 Rand a share. In 2009 the total dividends had been over 20 Rand a share, the same in 2010, last year in 2014 it was 34 Rand. Add those all up and you have received 190 odd Rand, back of the matchbox here. Fast forward to the interim results this year, the dividend may be suspended for the time being as the iron ore price has fallen from 190 odd Dollars a ton to below 45 Dollars a ton seen in July of this year, it has since recovered somewhat to nearly 57 Dollars a ton. The single commodity that the company mines has moved so violently and they have now been forced to cutting costs and worrying about conserving cash, like many other miners. Eish.

So Kumba used to be a major company in the ALSI 40, with a market cap of nearly 200 billion Rand. That would make it roughly the same size as Vodacom now. Parent company Anglo American is barely larger than that. Currently Kumba is half the size of the 38th placed Netcare in the index, times change and change very quickly. That is why I had to reply to the email that simply said: “You know I`m a big fan of Vestact and its optimism but one honest question: is there value still value in the SA equity market?”

I replied as follows: “Yes is the short answer. Stocks go up and down, in the end it is only the great companies that drive the levels of the overall market. For instance Aspen once traded at 5 or 6 Rand, I remember, as did Famous Brands, Steinhoff was 20 Rand a share not so long ago. Equally Anglo was under 100 Rand in May of 2003, I remember it well, by June 2008 the share price was around 540 Rand a share, It is now 145 odd Rand a share. In London it is down 14 percent in a decade and a half. The market consists of different companies doing different things, it is not a single beast is the point I am trying to make. Make sure you own the good ones and that you are not looking for a turnaround or hoping the price bounces back ‘just because’.”

I think the conclusion is that the market is not your portfolio and your portfolio is not the market, they are two very different things. In the same way the economy is not the market, and the market is not the economy, your portfolio is not the market. Nor is it reflective of the weaker Rand, as I pointed out yesterday, Sasol is down 14 percent in 10 years in Dollar terms (the Sasol ADR), the local price is up around 90 percent. All I am trying to say is that one should be careful suggesting that all stocks of a specific company, or indeed sector are all equal. They are not, all companies are different. Each specific holding in your account is completely different from the last and from the next.


Linkfest, lap it up

The World Economic Forum did some research on how companies perform after raising extra capital. It is not surprising that raising extra capital benefits smaller firms more than larger ones. I found it interesting to note that on average raising extra capital resulted in a significant increase in assets and sales, with the increased growth rates being sustained for a number of years. Given that you have professional managers running companies, it would makes sense that more often than not they allocate capital effectively. – How does issuing equity and bonds affect a company’s growth?

This highlights that being wealthy comes from equity in companies and not from your salary. It is great to see employees that have kept their stock over the years. I have chatted to local executives and they find that employees in our market don’t want shares and when they do get shares they end up just selling them – Millionaire Grocery Clerks: The Amazing WinCo Foods Story


Home again, home again, jiggety-jog. Stocks across Asia are mixed, Shanghai is up, whilst a negative GDP read in Japan has sent the Nikkei 225 lower, down two and one quarter of a percent. The huge news is that Kevin Anderson has beaten Andy Murray, you knew that already though. Pretty magical. We can forget the national football team, we don’t want to talk about that.


Sent to you by Sasha and Michael on behalf of team Vestact.

Email us

Follow Sasha, Byron and Michael on Twitter

087 985 0939

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s