How Much Risk Can You Take?
How October got its bad name! The History of Contracts for Difference
How October got its bad name! Page 12 Septembers Top Performers
Following the Inside Traders: Directors Dealing
WIN R100,000 in the Summit iTrade Virtual Competition
Defending Your Portfolio with a Tiger
Management at ISA consistently perform Page 11
Huge (HUG) on Service Page 6 Page 8
WitsGold (WGR): a bet on the gold price!
ELB Group is a good value play Page 9
Basil Read between the lines Page 8
The History of Contacts for Difference (CFDs)
Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
Notes from the Editor
Welcome to our first digital magazine edition of Sharetips. The magazine is designed to complement the website, but I believe that in time the website will very likely complement the magazine. I hope that you will find that this magazine format will deliver a good reading experience. This particular edition does not include as much media as we would like to add to furture editions. So look out for the podcast and video links in Novembers issue. Currently, the sharetips.co.za website provides some real-time research and recommendations. Unfortunately among all of the articles one tends to loose focus on the specific BUY recommendations. We do have the Power Portfolio which alllows longer-term investors to build a portfolio that ignores the daily clutter. We are also planning on introducing the Traders Tips video series which in turn offers very short-term trading opportunties that might well close-out on that day, or within that week. This monthly newsletter should close the gap, by providing a nice summary of some of the previous months performance tips and looking at shares you should be buying for the month ahead. There is an article advertising the new Summit/SanlamiTrade vitual competition and we trust that readers will take advantage and register for the competition.
If this publication can make it easier to make informed investment decisions about where to invest, then I think that we have achieved our goal. The key to successful investing is to take control of your investments yourself. Nobody is as interested in your wealth than you are. In this first edition, we examine the history of Contracts for Difference. We also run an aricle on how the month of October got is bad reputation. This initial publication is ony 14 pages long, but we are aiming for 16-20 pages for the November issue. We would really like to be able to publish this magazine so that it is available to subscribers at no cost. In order to get that to work, we will need support from advertisers. Advertisers may be listed companies. They may be stockbrokers or other financial institutions. They could be proprietors of stock market trading software, or other newsletters and services. The fact is that we have had around 6,000 unique visistors to our website every month and we believe that this magazine will ultimately help us reach twice that number of readers.
Disclaimer The views expressed in this newsletter or on the sharetips.co.za website are, unless otherwise stated, those of the author and not those of the holding company or the operational company, or their management. Whilst all reasonable steps are taken to ensure the accuracy and integrity of information, data and research, we do not recommend that any investor act solely on the information, research or recommendations made on this website, or through the newsletters. An investment in equity needs be undertaken in consultation with a registered financial advisor and stockbroker. SHARETIPS, Craig Martin, or any of the companies mentioned here accept no liability or responsibility whatsoever for an y action an investor may take based on the information, research or recommendations made as such information, research and recommendations are not intended to be construed as financial advice.
3 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
Inside This Issue Notes from the Editor Top Performers Following the Inside Traders: Directors Dealings Defending Your Portfollio with a Tiger WitsGold (WGR): a bet on the gold price! Basil Read between the lines Huge (HUG) on Service ELB Group is a good value play Last months top performance award goes to Finbond (FGL) Summit-SanlamiTrade Virtual Competition Shocking Results Expected from Altron Management at ISA continue to outperform Convergenet Holdings â€“ Out of Favour for Now How October Got a Bad Name What level of risk are you prepared to take? The History of Contracts For Difference
3 4 5 6 7 8 8 9 10 10 11 11 11 12 13 14
The list above shows the top thirty performers for September 2009 (calculated to 25/09/2009). You will notice that the majority of the list consists of small-cap shares, with a few medium-cap stocks, such as MUR and WGR. The list highlights the fact that a number of small cap stocks have been out of favour and were clearly showing value.
4 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
Following the Inside Traders: Directors Dealing A look at one the insiders have been doing over the past month highlights that there has definitely been more selling than buying. A company that has seen a fair volume of selling by Directors has been the AltX listed airline, 1Time Holdings. 1Time published their results at the end of August 2009, and managed to turn from a loss to a nice profit, with HEPS of 24,2cps. It is no wonder that the share price jumped from under 50cps to around 80cps. That is 60% - and there might be the temptation to bank those sorts of returns. A competitor, Comair, recently published their annual results for the year ended June 2009. Comair, which operates under British Airways and kulula.com indicated in their results statement that overall market volumes declined by around ten percent. It might not be surprising then that 1Time would still be under pressure in the current financial year.
Nearly R400,000 was raised through the sale of 1Time shares by Directors during the past month â€“ mostly at 80cps. Could this mean that there is some concern about 1Timeâ€™s profits going forward? Based on past results, there appears to be value in the share price. It is trading on a PE of under 3, but it is our bet that Directors know more about future prospects than we do. This is the only reason that we rate the share a HOLD.
5 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
Defending Your Portfolio with a Tiger We have seen shares like Aveng and Murray & Roberts recover quite nicely over the month of September 2009. One of the issues that we have had when recommending what shares to include or reweight in our Power Portfolio, is whether we should be increasing exposure to some of these cyclical stocks that now appear to be running. Well, as we enter the month of October, we are actually quite concerned about how the markets will hold up over the forthcoming weeks. We certainly believe that we are in the midst of a bull run, but we don’t think that this is going to be a very long run. So, our first port of call is to look at the traditional defensive stocks and to be a little cautious about cyclical sectors, such as construction. A sector that often stands up as defensive is consumables, particularly the general food retailers. Pick ‘n Pay, Shoprite and the Spar Group are probably the three most popular in this category. All three of these shares seem to have run quite hard at this stage. Our preference for the longer-term is most probably Shoprite Holdings (SHP) although we find it a little difficult to be recommending anything more than a HOLD recommendation on the three. So if the opportunity has been missed with the food retailers, what about the food producers. We expect real earnings growth to come out of Tiger Brands this year, and have already included this share as a core holding in our Power Portfolio. We were pleased to hear that Tiger Brands managed to place most of its Adcock Ingram Holdings shares with buyers at a price of 4550c – this raising gross proceeds of R469.9 million. Although the shares were oversubscribed, we think that Tiger are offloading at a very good price. With this cash in hand, one wonders whether the Tiger will sneak up on AVI or some other unsuspecting food producer in the near future. At 15200c, the share is trading on a PE of under 11, which is a good 35-40% lower than the rating most of the retail shares are trading on. The company has a number of strong brands, many of which you will probably find in your cupboard. We still recommend the share as a long-term BUY.
6 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
WitsGold (WGR): a bet on the gold price! The month of September 2009 saw gold shares make a quick dash and then an equally quick retreat. The gold price is US Dollars looked like it was confidently moving above $1,000 a ounce (although in Rand terms the gold price had actually gone backwards). Witwatersrand Consolidated Gold Resources Ltd (WGR) has five priority exploration projects, the key project of which is probably Bloemhoek â€“although De Bron is also looking like an interesting project. There are also goldfields in the Potchefstroom area and in Klerksdorp, where they are drilling down-dip extensions of the Vaal Reef. At the Bloemhoek project, the company announced the movement from an inferred resource into a probable reserve. There are 10 million less tones stated, but this is still positive news. So, we are looking at a probable resource of 40 million tonnes at an average gold grade of 6.7g/t. The pre-feasibility study speak of north of 9 million ounces â€“ at $1,000 an ounce, this means that there is probably around US$9 billion worth of gold just in the Bloemhoek project. At these kind of projections, the ore body can be mined economically. The feasibility study still needs to be carried out. Harmony Gold has an option to take up 40% after the Feasibility Study has been carried out. While WitsGold has sufficient cash to continue with the feasibility studies and exploration on its other projects for at least another year, it will need to go through some corporate action in order to raise the capital needed to move Bloemhoek into production. One should not forget that Witsgold is not a pure gold play, but also has some interesting uranium projects. Beisa North has an estimated resource of 47.5 million pounds of Uranium (U308) and 1.5 million ounces of gold. If you subscribe to further Dollar weakness, then you probably also subscribe to further gold price strength. If we had to look for a gold company that is undervalued and that will deliver in the years ahead, we would probably recommend WitsGold as a BUY at the current 7450c. The share was up 34,5% in September, and so we would much rather be buying on pullbacks. However, if the gold price does go back to over $1,000 an ounce WGR will rally up with that and could stop at around 9000cps. WitsGold is really a trading opportunity, for those with an appetite for risk.
7 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
Basil Read between the lines We very proudly recommended Basil Read Holdings Ltd (BSR) as a BUY when it was trading at 1550cps at the beginning of September. The share was then on a historic PE of 5. The share has since moved up ten percent to around the 1700cps range. The group is engaged in civil engineering, road construction, building, integrated housing developments, property development, stone crushing, bitumen distribution, and opencast mining operations. The group is trading on a Price/Book of around 1.7 and has a current order book of around R1.2bn. It grew revenue 30% in the last period, but management indicate that they will be a R10 billion turnover group by 2013. This could be achieved through organic growth and acquisitions. The group is in the process of acquiring the Gerolemou/Mvela group, which is involved in the construction of prisons and hospitals. Basil Read and TWP Holdings are also in discussions regarding a possible merger. TWP consults to both construction and mining enterprises, so we like the idea. The combined construction value for the group’s targeted PPP’s is in excess of R15bn. R30bn worth
of work is anticipated, specifically to supply water to the power plants currently under construction. So there really are some interesting prospects for Basil Read going forward, which is why we would still give the share a BUY recommendation.
Huge on Service Huge Group Ltd (HUG) has moved from overvalued to undervalued in our opinion. We like the recurring income story and the fact that management are keen to extend value to customers. We like that they have brought Ken Jarvis on board. They also brought Greg Wright on board to head up a newly-created channel and distribution division. Wright apparently pioneered fixed cellular routing in 1997 for Radiospoor. Wright’s appointment is intended to help the company establish a group of channel partners and distributors. Competitor, Vox Telecomm faced the challenge of getting distributors and channel partners by setting up a multi-level marketing type approach. Huge are looking at using Wright to develop a more traditional approach. The latest news is that Huge Telecom, the main operating subsidiary of the Huge Group, have signed an agreement with ECN Telecoms, which will see Huge add ECN’s voice products to its portfolio. Essentially, as the distribution channels increase, Huge wants to look at increasing its product portfolio. The ECN deal is the first reseller deal, but more are expected to come in the future. It seems as though there is a strong push from Huge to grow their network of resellers and partners and we look forward to other news coming though in the months ahead. We still like Huge at the current price, although we do expect the cash flow to be under a bit of strain due to higher bad debts. The company is probably worth closer to 140cps than the current 70cps trading price.
8 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
ELB Group is a good value play ELB Group Limited (ELR) is a top supplier of engineered products to the infrastructure, mining, processing and construction industries. The group was established over a century ago by Edward L Bateman and operates in three divisions; ELB Engineering Services, ELB Equipment and Ditch Witch (Aus). The ELB Group produced a satisfactory set of results for the year ended 30 June 2009, given the economic pressures being experienced in the sectors in which the group operates. Revenue from continuing operations increased 16.5% to R 1 246 million (2008: R 1 069 million). However operating costs before depreciation increased 20.9% to R 1 170 million (2008: R 968 million), which was the main contributing factor to the decrease in net profit. Headline earnings declined 23.2% to R 51.3 million (2008: R 66.8 million), which resulted in headline earnings per share of 189.1 cps (2008: 243.2 cps). A final dividend of 20 cps was declared in line with the groupâ€™s conservative cash management, bringing the total dividends for the year to 30 cps. Cash generation was poor, reflecting a cash inflow from operating activities (before dividends) of R 0.1 million (2008: R 120 million) with a large portion of working capital being tied up in accounts receivable of R 152 million. The groupâ€™s balance sheet remains strong, with very low gearing and strong cash reserves of R 290 million (2008: R 315 million). The group is committed to property additions and extensions of R 24 million in the forthcoming year. However, this will be financed with minimal impact on cash reserves. The group is well established in their market and is able to take advantage of the expected infrastructure spend in both South Africa and Australia. Management indicated that the coming twelve months are being approached with caution as it is anticipated that trading conditions will remain difficult. Cash resources look adequate and cash flow is good. The group does not appear to be expensive trading on a P/E ratio of 5.6 and a TNAV of 1078 cps, with 1074 cps in cash. Although the current year dividend has been reduced by 50%, resulting in a dividend yield of 2.86%, the group has a good track record of paying regular dividends. Due to the small market cap and limited tradability of the group, some volatility and risk may be experienced in the short term. However, for longer term investors looking for exposure to the small cap sector, the group appears to be offering value and hence we recommend it as a BUY.
9 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
Last months top performance award goes to Finbond Finbond Group Limited (FGL) was the best performer over September 2009, having risen 112%. Finbond has gone through cash-flow pressure in the past, and sold off property on a lease-back basis in order to secure funding. The company reported a substantial loss due to impairment of around R73,2million in the last set of results. This impairment comes as a result of revaluing goodwill and intangible assets. We were quite happy with this move as it makes the Balance Sheet appear more realistic. On a positive note, the company has borrowed international funds when the Rand/US Dollar exchange rate was a lot higher. We would expect that Finbond will benefit from currency translation now that the Rand is so much stronger. It must also be understood that Finbond has moved its strategy away from bond origination or bridging or other finance on property. In fact, Finbond finances cellphone purchases, it supplies pre-paid electricity through its branches and provides short-term personal loans or typically 30-90 days. The company acquired Moneyline and New World Finance and entered into an agreement with Net1 earlier this year. A very different strategy to where the company was heading two years back. We believe that the worst is behind the company and would recommend it as a speculative BUY.
Summit SanlamiTrade Virtual Competition Summit and SanlamiTrade are running a new online trading completion. It is open to â€œprivate usersâ€? only â€“ no professionals. It is designed around active day trading, and runs for one month only. What is very exiting about this competition, is that it allows you to trade and listed JSE instrument. That means EFTs, warrants and share installments. Previous competitions limited the number of times that you could trade, but not tis completion. There are also no limits on the number of shares you can hold, the amount that you can put in one share. This means that you can place 100% of your investment in one PUT warrant if you so desire. The virtual portfolio starts at R100,000, so you can invest all of that in one share if you wish. What they have done to ensure that the trading is more a reflection of the real-life situation is tha when buying an instrument, the price at which the trade will take place is the last recorded offer price on the JSE. When selling an instrument, the price at which the trade will take place is the last recorded bid price. Past competitions traded on the last traded price, but sometimes the last traded price was higher than the current bid or lower than the current offer. This provided an opportunity to make certain returns knowing that the next trade is going to be higher. You can only register once- as you need to provide your ID and email address. There is also no resetting of portfolios. Past competitions allowed high risk takers who had taken a big loss to try again. What is also interesting is that this competition is a bit like the PSG Make a Million competition in that it is a cash-to-cash competition. You have to sell out of your positions before the end of the month.
10 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
Shocking Results expected from Altron
Management at ISA consistently perform
Allied Electronics Corporation Limited (ATN) issued a trading statement where they indicate that basic EPS will be between 58-68% lower and HEPS will be 48% to 54% lower and diluted adjusted HEPS will be 41-47% lower. There are some impairments that are going to come through in this set of results, particularly to the goodwill on the Powertech Calidus and Bytes` Xerox UK acquisitions. Powertech has been experiencing extremely difficult trading from the slowdown in building and construction and mining. I also believe that they took a serious knock with the drop in copper prices. Bytes is also suffering under the current climate as hardware and IT service spend has been deferred or cancelled. The result is that jobs are being taken on at smaller margins simply to ensure deal-flow. So Bytes is certainly under pressure. Altech is performing well, but we expect that the cellphone side of the business will see some margin pressure in the year ahead. At the current price of around 2650cps, the company will be on a forward PE of over 20 â€“ which seems very high. Our current rating on Altron as a HOLD, but over the longer-term we expect that the share will reward shareholders.
ISA Holdings (ISA) has had a reputation of steady and constant year-on-year growth in revenue. This year was no different in that turnover increased 17%. The bottom-line figure was not bad in the current environment. The profit for the period came it at just over R7 million against R4,9 million for the August 2008 profits. The HEPS for the period came in at 3.7cps. The profit could have been at least R2 million better were it not for a foreign exchange loss as a result of the stronger Rand. A present ISA has about 23% of its turnover derived from offshore. The company has steadily increased recurring revenue in the past and this year it has also increased to represent 65% of sales. The board does not have a policy of declaring an interim dividend, but normally gives quite an attractive dividend at year-end. The company has been involved in share buy-backs and indicates that they will continue to do so. Directors have been sellers at 45cps. This is still a forward PE of around 6.5 and we think that the share is probably still showing value. We would ACCUMULATE on weakness.
Convergenet Holdings â€“ out of favour for now! Pieter Bouwer, CEO of information and techonology company, ConvergeNet Holdings indicates that the company is looking at new acquisitions and the drop of 53% in the share price this year is mostly a factor of shareholders ignoring smallcap stocks. ABSA currently hold around 10% of ConvergeNet as a result of SSF defaults. Bouwer would be happy is they remained as partners in the business going forward. WATCH THE VIDEO HERE! 11 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
How October Got a Bad Name! The investment community and the press have loved to paint October as the worst month to be in the stock market. Obviously, the cause is that the largest one-day declines in the Dow Jones Industrials happened in October. It can be said that the stock market crashed three times and each of those disasters happened in October. The first crash was the beginning of the great market implosion that helped usher in the Great Depression. On Oct. 29, 1929, the Dow plunged 12.8 percent, which is substantial. However, it didnâ€™t stop there. The market kept dropping and eventually lost approximately 90 percent of its value. The crash of Oct. 19, 1987 was much worse. The Dow lost 22.6 percent of its value in one day. The slide continued for several weeks adding to the losses, before the market found a bottom that would hold. October of 2008 joins the infamous list of market melt downs. The problems started months before, but October was the worse month in a string of bad ones. The S&P 500 was down by more than 27 percent at one point in the month. The statistics actually tell a different story. The facts, are that September is historically is the worst month, with historically, more down months that positive months since 1926. It is not easy to have disciplined and unemotional thinking and to go out and buy stocks, when everyone else is selling. The fact is that many investors look favorably upon shares that are rising in price and seem to reject those falling in price. By purchasing the stock of companies that are out of favor, the contrarian has an opportunity to realize profit should these companies regain popularity. Sure, you might have to wait a while for the recovery, but when it does come, it is fast a furious. For example, can you remember Murray and Roberts at under 200c less than a decade back? At that time, construction shares were out of vogue. The share broke through 10000cps a year ago - that is nearly 5000% in a decade. It since halved to way under 5000cps. September saw Murray bounce back over 33% not a bad performance in anyoneâ€™s books. So the truth is that most Octobers are not much different from any other month of the year. They stand out because most companies begin their fourth quarter in October. For retailers and other companies with ties to the holiday shopping season, October is the beginning of the most intense and important shopping season. The market has certainly recovered substantially from last year crash, but it is difficult to say with any certainty what he performance for the month ahead will be like. What I am sure of though, is that any bad news is likely to be met with aggressive selling â€“ so I am looking for shares to go SHORT on. 12 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
What level of risk are you prepared to take? Whatever your investment strategy the starting points should be the same, and we can help you identify the type of approach best suited to your particular needs and preferred balance between risk and return. When you speak to nearly any investor, they will tell you that they desire the highest returns possible. However when you expand on the conversation, most investors desire high returns with low volatility. The fact is that I have yet to find this illusive product. There may be one or two listed shares that fit the criteria when you smooth their performance out over fifteen or twenty years, but you cannot avoid week-to-week volatility if you are chasing high gains. Generally, financial planners will ask investors a series of questions and place them into one of three possible categories â€“ namely cautious, moderate or aggressive. Cautious Investor The cautious investor understands that they need to achieve a return better than the rate of inflation to maintain their financial position and that in order to beat the returns available on cash deposits they may need to accept some stock market risk. However the cautious investor is uncomfortable about sharp falls in value and wants to invest in stable investments where the risk of this happening is limited. If they do investment directly in the stock market, you will probably find the amount invested is a small portion of their total investments. Their money is likely in a large-cap share that producers strong, consistent dividends, or in an index tracker like Satrix40, or a listed property stock. Keeping ahead of inflation and getting a slightly better return is more important than getting a high return only by accepting a higher level of risk. This type of investor will not be interested in leveraged instruments such as single stock futures or contracts for difference. Moderate Investor The moderate investor wants to see their money grow over the medium to longterm 5 years. As well as beating inflation the moderate investor knows that capital growth available from investing in the stock market gives them an opportunity of achieving this. Although not happy about a significant short-term set-back the moderate investor is willing to accept the risk as they are investing for the longer-term. However sustained falls over a longer period might persuade the moderate investor to move to less-risky investments. Aggressive Investor The aggressive investor wants to see real capital growth in the short-to medium term of between 3 to 5 years and isnâ€™t concerned about short-term fluctuations. This investor will be prepared to take on a wide range of stock market investments including potentially volatile shares where there are high potential gains but also where the risk of losing money is higher. The aggressive investor may offset these high risk investments by diversifying into lower risk areas and may only be making those high risk investments with money they could afford to lose. 13 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved
The History of Contracts for Difference Contacts for Difference (CFDs) were initially used by hedge funds and institutional investors to hedge their exposure to stocks on the London Stock Exchange (LSE). They actually started being used in Britain in the early 1970’s, but required high sums to trade, and so were only the foray of institutional investors. In the late 1990’s CFDs were introduced to retail investors as an Over the Counter (OTC) product (i.e. they were not listed or traded on an official stock exchange, but were established on a negotiated basis between individual buyers and sellers. This was facilitated by various financial services firms and banks). What made CFDs popular with individual investors was the fact that they were exempt from the stamp duty applicable to normal share trading, and also that they allowed investors to trade on leverage on a range of underlying instruments. In some instances they were very tax favourable, or in some instances carried no tax liabilities. The leverage issue or gearing has undoubtedly been a large part of their appeal of CFD’s. There are a number of other derivative products that offer gearing, but they tend to be a lot more complicated due to strike prices, and strike dates that mean that investors need to calculate discount values and other use Black and Scholl models. As the popularity of CFDs grew CFD providers quickly expanded their offering from LSE shares to include most global stock exchanges, indexes, commodities, and currencies. Index CFDs, such as those based on major indexes such as the Dow Jones, NASDAQ, S&P 500 and the FTSE, soon became the most popular individual CFD traded. Australia was the first country to list CFDs, with the Australian Stock Exchange, which was done in November of 2007. In South Africa, the JSE tended to prefer single stock futures (SSF) and has avoided any involvement with CFD’s. In mid-2008, the London Stock Exchange listed CFD’s and in view of their popularity in the market, we would not be surprised is the JSE considers regulating CFD’s on our local exchange in time. These instruments have been available in South Africa since 2001, although it was only in 2007 that they became available to retail investors. Today, CFD trading is very much a part of how speculators make money. While single stock futures (SSF’s) are regulated derivatives and also very popular – on the whole, CFD’s are cheaper to trade and often offer other advantages.
14 Sharetips Newsletter sharetips.co.za (C) Copyright October 2009 All Rights Reserved