Contrarian Approach to Oversold Industrials
02-Feb-2012 | News-Press Release
Global stock markets have been under pressure the last few weeks as uncertainty around Greece’s sovereign debt, as well as economic growth prospects in the United States forced investors to the sidelines. The sell-off has seen the JSE All Share Index tumble 8.83% from its February highs. The Top 40 Index, which is heavily weighted in favour of Rand-hedge shares, has dropped 10.46% lower because the Rand has appreciated by about 8.34% during the same period. The JSE Resources 20 Index, which includes Anglo and BHP Billiton, has dropped 18.19% from its February highs, while the Gold and Platinum Mining sectors have lost 26.48% and 27.57%, respectively. This is despite the Dollar gold price increasing, while the platinum price has only fallen about 10% over the same period.
The action has shifted to industrial shares and to a lesser extent the financial shares. Based upon the Relative Strength indicator, defensive shares like Tiger Brands, Medclin and Netcare have outperformed relative to the JSE All Share Index. A contrarian investor prefers to buy shares that most people are selling. Looking at other good quality industrial shares that are market underperforming and trading in oversold territory, we pick up SAB Miller, Steinhoff and MTN Group. SAB Miller is a high quality company with an excellent track record and a strong defensive portfolio of brands. Trading on a rolling PE ratio of 16.9 times and a dividend yield of 2.4%, we believe the company to be fairly valued considering the low interest rate environments where the group generates a significant portion of its cash flows. We, therefore, retain our hold recommendation on the share. Steinhoff is trading on a rolling PE ratio of 9.2 times and at a 20% premium to its NAV, while it has a dividend yield of 2.8%. MTN Group is a quality company and offers healthy cash generation, high margins, above average ROE and a strong balance sheet. We believe that the share offers value trading on a rolling P/E of 13.4 times and at 3.4 times to its NAV. We recommend investors to buy the share as the share price is also supported by a solid dividend yield of 3.8%.
All three shares are trading below their moving averages and the trend remains bearish. While they are also affected by the strong Rand, from a technical point of view they have much more upside potential.
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