Tuesday, 07 June 2011 - 20:00
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The correlation between implied earnings growth and actual performance
In our monthly analysis of the valuation of the local equity market, we place little to no value in attempting to forecast data. Forecasting suffers from at least two problems. In the first instance forecasting of uncertain events has a low degree of predictability and secondly even if one were to correctly forecast certain factors such as the oil price for an oil company or the input cost of maize to a poultry producer, there is little to no correlation with investment performance.
Fundamental company analysts tend to build models that attempt to assess the main drivers of a company's performance, be it the price of oil, or maize or margins and volume growth of a retailer etc. We do agree that analysis plays a very important part in the understanding of the business drivers and risks. When investing hard earned money into a business an investor will want to have an understanding of the main factors involved.
However of even more importance than the primary drivers is the valuations component. The reason that forecasting has a degree of predictability on actual investor returns is that at times both analysts and investors tend to become very optimistic about future prospects. This optimism is quickly factored into prices, which in turn leads to lower than expected returns.
Conversely when expectations about future earnings are on the lower end of the spectrum, actual future investment returns realised tend to be higher. The scenario tends to be a case of build in low expectations and wait to be surprised on the upside. We tested this theory looking back in time.
On the assumption then that an investor is looking for say a 15% compounded nominal return over a 5 year period, we can look back in time at what the market prices were implying for company earnings growth.
On the assumptions used, the market moves from a case of implying 5% earnings growth to 25% earnings growth.
We then overlayed this with the actual 5 year compounded return that an investor would have received had he invested at that point in time. The chart below provides a summary.
Chart : Implied earnings growth on JSE and actual compounded return
Source: Seed Investments
The results back up our hypothesis in that at the times when the market is implying high earnings, this tends to correlate with low 5 year actual returns.
Conversely at times when the implied earnings expectations fall to below 10%, investors tend to be rewarded on the upside with superior investment performance.
With the market flat over the last 6 months, despite earnings growth, the implied growth is slowly being lowered from higher levels.
Ian de Lange
021 9144 966
Tue, 07 Jun 2011
Business Day reported that Spur MD Pierre van Tonder commented that the company is looking for more opportunities even after acquiring a 60% stake in restaurant chain Cappuccino's for R25 million. "We are always seeking new growth opportunities," he said. The. . .
Business Day reported that Fiuranium CEO Deon van der Mescht announced that the company will postpone the commissioning of its uranium plant at its tailings treatment business to conserve cash ahead of a convertible debenture maturing next June. The postponement is. . .
First Uranium's consolidated revenue was USD172 million for March 2011, an increase of 86% from USD93 million, resulting in the company reflecting a gross profit of USD20 million (2010: gross loss of USD18 million). Remembering that First Uranium remains in a capital development and growth phase, the consolidated loss for the year was USD70 million (2010: loss of USD92.2 million). Basic loss per common share was reduced to 38cps (2010: basic loss per common share of 56cps).
Prospects. . .
World Markets (Spot Prices)
|JSE Top 40||17:00||28494.90||217.80||0.77%|
|JSE Indust 25||17:00||27794.34||180.52||0.65%|
|Rand / Dollar||19:58||6.7049||-0.0778||-1.15%|
|Rand / Pound||19:55||10.9934||-0.0693||-0.63%|
|Rand / Euro||19:55||9.8450||-0.0453||-0.46%|
|Rand / NZD||19:58||5.5094||-0.0135||-0.24%|
|Rand / AUD||19:55||7.1945||-0.0868||-1.19%|
|Yen / Dollar||19:58||80.1500||0.0300||0.04%|
|Euro / Dollar||19:57||0.6811||-0.0048||-0.70%|
|Dollar / Euro||19:57||1.4683||0.0104||0.71%|
|Pound / Dollar||19:55||0.6079||-0.0033||-0.54%|
Click here for the Sharenet Spot Price page
The JSE Today
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||30,850.19||199.10||0.65%|
|Oil & Gas ||26,684.20||481.16||1.84%|
|Oil & Gas Producers ||14,347.60||258.71||1.84%|
|Basic Materials ||29,894.82||247.96||0.84%|
|Forestry & Paper ||14,966.91||248.83||1.69%|
|Industrial Metals ||29,273.84||568.47||1.98%|
|General Industrials ||76,742.60||870.04||1.15%|
|Consumer Goods ||27,310.54||35.86||0.13%|
|Automobiles & Parts ||3,226.85||.00||0.00%|
|Health Care ||33,551.05||287.57||0.86%|
|Food Producers ||47,797.36||423.40||0.89%|
|Index Name||RP||Move||% Move|
|Personal Goods ||430.47||-3.99||-0.92%|
|Consumer Services ||54,163.93||514.24||0.96%|
|General Retailers ||41,006.13||212.92||0.52%|
|Travel & Leisure ||3,656.91||28.65||0.79%|
|Support Services ||2,390.59||15.39||0.65%|
|Non-life Insurance ||30,502.93||191.56||0.63%|
|Life Insurance ||15,835.40||132.12||0.84%|
|General Financial ||2,309.79||16.78||0.73%|
|SHARIAH TOP40 ||3,139.21||30||0.95%|
|FTSE/JSE SHARIAH ALL||3,205.18||30||0.95%|
|FTSE JSE Fledgling ||4,610.21||-17||-0.37%|
|FTSE/JSE Alt X ||1,058.50||-7||-0.68%|
|SA LISTED PROPERTY ||384.53||0.88%|
|CAPPED PROPERTY ||318.86||0.87%|
|FTSE/JSE RAFI 40||6,643.93||59||0.90%|
|Capped Top 40||14,885.07||107||0.73%|
|Capped All Share||16,036.70||117||0.73%|
Click here for the Sharenet Index Summary page
Latest Consensus Changes**
|NED||NEDBANK GROUP LTD||SELL||02 Jun|
|SBK||STANDARD BANK GROUP LIMIT...||SELL||02 Jun|
|AIP||ADCOCK INGRAM HLGS LD||HOLD||02 Jun|
|LHC||LIFE HEALTHCARE GRP HLDG ...||BUY||02 Jun|
|EQS||EQSTRA HOLDINGS LTD||HOLD||02 Jun||
|Expected||Company Name||Fin. Date|
|08 Jun 2011||RACEC||March 2011 (Interim)|
|09 Jun 2011||ACUCAP||March 2011 (Final)|
|09 Jun 2011||KEATON||March 2011 (Final)|
|13 Jun 2011||BSI STEEL||March 2011 (Final)|
|13 Jun 2011||MIXTEL||March 2011 (Final)|
|TLM||TeleMasters Holdings Ltd||10/06/2011||Confirmed||
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