2018 was a difficult year for both SA and global markets. As the national elections loom, the key issues investors will be watching are whether the Reserve Bank will continue to hike interest rates, clarity around land reform and growth forecasts. You can read all about it in our market outlook for 2019, but here we will discuss individual shares and how the current economic environment could impact your portfolio.
In this Part 1 of the article, Stockpicks for 2019, we take a look at 10 diamonds and 10 dogs of the Johannesburg Stock Exchange.
Naspers [NPN] (JSE diamond)
Neville Lahner - Read Neville’s bio here
Naspers has for many years now, been a function of the Tencent share price. Their 31.2% holding in Tencent accounts for the largest part of their revenue. Management have been criticised for not having to worry about the other brands within the Naspers group, as Tencent was adequately providing investors with phenomenal returns. In recent times there has been a shift in focus. Naspers sold 2% of its stake in Tencent realising $9.8 Bil and have started making several acquisitions, most notably a food delivery business in India and Germany. They have also announced that they will be unbundling some non-core assets, namely Multichoice. So, it appears that management is focused on trimming the dead wood, and are looking for new exciting opportunities. Tencent has also been under pressure due to mobile gaming restrictions being implemented in China, this has prevented Tencent from launching new games to addicted millennials. With China’s GDP slowing I would imagine that these restrictions will be lifted and this will bode well for the Tencent share price. Given all of the above, I would certainly have part of my portfolio in Naspers for 2019.
Vodacom [VOD] (JSE dog)
Steinman de Bruyn - Read Steinman’s bio here
Vodacom has had its day!
I can’t see their business model adapting quickly enough to the relentless pressures being placed on it. With a price earnings ratio of 15x and benign growth on the horizon (if at all), the share isn’t cheap despite a dividend yield of 6%. The major issue they face is an onslaught towards lower data prices, not just from the average consumer, but from competitors like Rain as well. Their business model is shifting towards that of a utility, and I can’t see an investor achieving returns of more than 9% to 10% (if you’re lucky) over the next couple of years. I need to clarify, I don’t see Vodacom collapsing, or falling much more than it already has. However, the structural changes are just too big to ignore. There is no point in owning Vodacom shares. Investors should rather place their money in the Sharenet BCI Income Fund which returns +-9% per annum, with significantly lower risk.
British American Tobacco [BTI] (JSE diamond)
Martin Strauss - Read Martin’s bio here
Battered and bruised last year, as a combination of headwinds plagued this high-quality company in 2018. This year offers more reward than risk in my opinion for British American Tobacco (BATs). The stock is attractively valued, and a re-rating of the share price to a more accurate valuation is imminent. I expect rand weakness until (at least) the local government elections have concluded later this year, which should give the stock a further boost. Despite the menthol ban, the dividend remains attractive and should be sustainable. The company remains well positioned in the vaping markets, and is conveniently placed to move into the ever-growing cannabis industry. The stock has consistently increased adjusted earnings per share and dividends (almost 10% per annum) to shareholders since 2000, and is attractively priced with a 8.3% forward looking dividend yield and single-digit price earnings ratios.
Woolworths [WHL] (JSE dog)
Iwan Swiegers - Read Iwan’s bio here
Woolworths released a very weak first half 2019 trading update, and guided adjusted headline earnings per share down between -12.5% and -7.5% (195.5cps - 206.6cps). Given the earnings guidance, I expect margins to contract further in the group’s SA clothing division. David Jones sales declined 5.3% in the last 6 weeks.
I remain concerned about the outlook for overall retail spending, especially in the clothing side of the business. I prefer to stay clear for now, as I don’t see any turnaround soon.