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Opinion

There is more to a company than its share price 

Anet Ahern, CEO, PSG Asset Management
March 12, 2020, 2:48 p.m.
207

Word count: 568

Investors often focus disproportionately on share prices, to the detriment of a sound long-term investment strategy. It is easy to get caught up in the negativity and headlines that often drive share prices, rather than focusing on the fact that these shares are issued by robust, real-life companies that continue to bring in earnings despite challenging market conditions.

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Investors often focus disproportionately on share prices, to the detriment of a sound long-term investment strategy. It is easy to get caught up in the negativity and headlines that often drive share prices, rather than focusing on the fact that these shares are issued by robust, real-life companies that continue to bring in earnings despite challenging market conditions.

The market can be extremely efficient at assessing risk. Recently we saw that when a new virus emerged in China, share prices around the globe responded swiftly to the new economic threat. However, we also believe the market can enter into self-fulfilling feedback loops, with negative expectations feeding a further gloomy outlook and positive expectations feeding further inflated expectations. The role of sentiment on the long-term returns investors ultimately achieve should not be underestimated, especially when sentiment gets the upper hand and starts driving decision-making.

We believe the market has already priced in much of the bad news around the South African economy. Poor economic growth, high unemployment and a potential Moody’s downgrade to junk status are all known risks. However, we believe the market has been extremely negative in its assessment of these risks. SA Inc. shares have been harshly judged by the market, while a few rand-hedge market darlings have seen their prices rise even more. 

However, history has shown that it can be a big mistake to equate low prices with low value, or little future return potential. In challenging market conditions, the strong often get stronger. Roadbuilder Raubex is a prime example of this principle at work. As tenders dried up over the past few years, the number of JSE-listed road builders in the industry started to shrink from 10 to 2. With fewer players left in the market, however, a company like Raubex is well-positioned to exploit market opportunities on offer, capturing a bigger market share.

Cycle example: Raubex

Sources: PSG Asset Management, Bloomberg.

Raubex’s share price has already appreciated by 50% since late 2019, and serves as clear example that there is still value to be derived from South African companies, even if we assume a low-growth scenario. Moreover, it should be noted that the appreciation in Raubex’s share price happened at a time when local news headlines were extremely negative. This again reinforces the dangers in looking for catalysts before deciding to invest – in our experience, there is a never a clear signal to the bottom of a company’s (or the market’s) share price. Those who sit on the side lines waiting for catalysts are likely to miss out.

As value investors, we are always excited when we can find above-average quality at below-average prices, because we believe the price investors pay for assets when investing plays a key role in the long-term returns they can expect to realise. We are currently encouraged by what we consider to be an unequalled opportunity set in our funds. It is true that in the short term, you can be made to look very foolish by the market when you enter into positions early, as value managers often do. However, we remain focused on finding quality companies that stand out from the rest at good prices, understanding that we are ultimately investing in real companies that bring in real earnings. We believe that this ability to look beyond the headlines will ultimately reward our investors handsomely in the long run.

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