While there are a few telecommunication companies to invest in on the JSE, MTN and Vodacom are the two dominant players. But for investors looking to invest in the sector, either to achieve portfolio diversification and/or looking for capital gains, which of these stocks is the preferred one? I will attempt to answer this question by looking at the two companies’ performance relative to each other.
It should come as no surprise that each company has had its periods of relative outperformance. See the below chart plotting the two graphs for the last year:
If we perform a regression analysis, we can further break down the data, making the two shares more easily comparable.
And if we standardise the regression residuals:
The above chart tells us how many standard deviations the relative value of the shares are away from the mean (average). Therefore, if the companies were ’equal’ to each other, the graph would be on solid black line (0 standard deviations). What we can see now, is that relative price of MTN to Vodacom is nearly 2 standard deviations away. Therefore, MTN is undervalued relative to Vodacom and should offer more upside over the short to medium term. Statistically, 2 standard deviations is very significant and one would expect to see the relative value return to the mean, or at least return to the -1 to 1 standard deviation range.
If you take a look the last time MTN/VOD was -2 Standard deviations apart, you can see in the graph how the relative value returned to a more ’expected’ valuation. Likewise, when the standard deviation was +2 (Vodacom undervalued relative to MTN), the relative value returned to a more ’normal’ range. On 21st of October when the standard deviation was -2, if one bought MTN and sold it at -1 standard deviation (conservative estimate) or held it until the mean (solid black line), MTN price performance was 6.53% and 7.57% respectively, while Vodacom was down -1.29% and -0.92% (total outperformance of 7.82 and 8.49%. If you had held MTN until you made the switch to Vodacom at +2 standard deviations, you would have a return of nearly 26%.
The bottom line:
Portfolio Manager and Securities Trader
Cheyne has spent the last 10 years working in London, holding numerous positions within Equity and Equity Derivatives at various Investment Banks. His main focus has been on South African and Emerging Markets and also gained good exposure to global equity markets and products. He completed both his BCom degree in Economics and his BCom. Honours in Financial Analysis and Portfolio Management at the University of Cape Town. After completing each of the rigorous exams, Cheyne became a CFA Charterholder in 2014.