IN THIS ISSUE:

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• April’s quiet market pre-empts the “sell in May” warning
  
• An 18% dip in bottom line profit shouldn’t signal the “death knell” for South Africa’s second-biggest retailer
  
• Buy on dips! Today’s price weakness is the perfect opportunity to top up your retail sector exposure

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From Gareth Stokes, editor, Red Hot Penny Shares

Dear Reader,

April is a terrible month for stock market traders. Instead of benefiting from 21-odd days of strong market activity they have to make a living amidst a sea of public holidays… The markets were closed for Easter Friday and Easter Monday – and government somehow squashed Freedom Day (27 April) and Workers Day (1 May) into the same two week period...

But the traders weren’t the only ones struggling… Trying to conduct any business between Friday, 22 April and Monday, 2 May you’ll probably stumbled across a ‘closed’ sign. Whether you’re a stock market trader or ordinary private sector business it’s difficult to make money in April! And that got me thinking about the age-old stock market maxim: “sell in May and go away!” Stockmarket Sleuth editor Gary Booysen wrote about the term in one of his recent trade alerts...

He said the old maxim could hold true again this year, but had this ‘advice’ for his subscribers: “Stick with your shares and make sure you've got enough loose cash to grab an opportunity if we see a 10% to 15% pull back.” The bottom line, in his view, is the long-term market outlook remains “rosy”!

I’m not sure I share Booysen’s enthusiasm. Spend a few minutes immersed in global financial news and the business outlook is more “stormy” than “rosy”! Globally we’re processing concerns over the Japanese quake/tsunami/nuclear disaster, widespread sovereign debt (yes, even in the US), and the continued civil war and civilian unrest in the Middle East and North Africa (MENA) region...

Back home we’re facing a slower than expected economic recovery, inflation (with the threat of interest rate hikes) and the belligerence of an increasingly strong trade union movement. Mark my words – the domestic economy is being slowly strangled by their never-ending inflation-plus wage demands… The public sector wage bill has doubled over the past five years as wage demands and ‘jobs for friends’ policies spiral out of control… And this year’s wage negotiations are set to cause more damage!

But I digress. Wage pressures can have good consequences too. And any improvement in South Africa’s overall wage levels creates opportunities for certain sectors of the economy...

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The Stock Market goes up...The Stock Market goes down...But some investors make money no matter what!

Read on to discover how you can get YOUR piece of the action by buying shares that cost less than R10!

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Higher wages – deserved or not – should bolster retail sales...

Each inflation-plus wage increase leaves thousands of South Africans with more cash in their pocket each month. And since the majority of wage settlements take place in the low to mid-income tiers we can expect the bulk of this salary windfall to make its way to purveyors of basic goods and services – the food and clothing retailers.

I think this realisation has kept local investors ‘keen’ on the likes of Shoprite Checkers (JSE: SHP) and Mr Price (JSE: MPC)… The question is whether these already expensive shares can trade higher from today’s level? Now – I’m wary of calling the top when a sector is running hard – but I’m leaning toward a correction from some of the sector’s leading companies. If my gut feeling pans out these counters could be in for similar price corrections to the one we’ve witnessed from Pick ‘n Pay (JSE: PIK) of late.

Shares in South Africa’s second-biggest retailer have slumped 9% this year in contrast to the 0.42% appreciation from Shoprite! And we don’t have to look too hard to find reasons for its fall from grace. The group’s full-year results to 28 February 2011 show a worrying 18.4% decline in profit… Management blames (ironically) industrial action and higher operating costs (the 25% surge in electricity prices cannot be helping) for this hiccup…

The group failed to meet analysts profit forecasts too. They were expecting around 211.8c/share in headline earnings while the group delivered a mere 186.14c! The profit slump occurred despite a 5.9% increase in sales, to R51.9bn. Management hasn’t minced words: “The group is disappointed in the result, but would like to give credit to the Pick n Pay team for achieving an enormous amount under trying conditions!”

What I really like is the comment that follows:

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A great opportunity to buy into the dip!

Pick ‘n Pay’s executive added: “We are in the process of positioning Pick n Pay for the future, and strongly believe that our strategic initiatives will build a sound platform for future growth and continued success in the medium to long term!” And that’s what every ‘blue chip’ investor likes to hear! Real profit is generated from a solid base!

Should we be ‘psyched out’ by the group’s disappointing result? I’m not so sure we should. You see Pick ‘n Pay’s numbers haven’t yet reflected the improved trading conditions thanks to the wage increases (already mentioned), growing Africa-wide business and the ever-present food price inflation.

Higher food prices make it possible for food retailers like Pick ‘n Pay to increase turnover and profit more easily than in times when food prices are declining! That’s why I believe the current price weakness offers an excellent opportunity for long-term investors to top up on their retail sector exposure. You can accumulate the counter on pull backs to R40/share (from its current R42.20).

I’ll be back with another MoneyMorning instalment next week Thursday.

Until then, let the profits roll,

Gareth Stokes