From Gareth Stokes, editor, Red Hot Penny Shares


Dear Reader,

I’m sitting in the foyer of the Grayston Sun in Sandton and waiting for a massive property summit to get underway. As I sip my cup of coffee, my attention is diverted by the Business Report front page – “Public unions reject government offer!” – Or something to that effect. The rumblings of public sector discontent once again threaten to spill into the streets of South Africa. Schools, home affairs offices and hospitals and clinics are going to feel the pinch. But it’s you and me – the ordinary South African – that’ll suffer in the long term.

South Africa’s unions are holding government over the proverbial barrel ignoring an offer of 7% and an increase to R700/month in their housing allowances. They are sticking with their 8.6% and R1000/month demand. Listening to the radio this morning I can’t help but scoff at the DJ’s suggestion the warring parties are “close” to a solution.

The unions are asking government to up their wage offer by R624 million per month – or a budget breaking R7 500 million each year. Any guess, dear reader, as to where government will go in the hunt for these funds? They’re going to come after the five odd million of us who religiously pay our income tax dues. And that’s not good for South Africa Inc.

Consumers account for approximately two thirds of GDP expenditure – and additional taxes mean they’ve less to spend. I think director at Sasfin, David Shapiro, gets things spot on when he observes the benefits from our low interest rate environment have been all but eroded by increasing taxes – direct and indirect. 

And finally I’m seeing the cracks in the retail sector to back up his theories! Just take a look at Shoprite....

I’ve been amazed by the resilience of the country’s top three general retailers, Shoprite, Pick ‘n Pay and Spar. While the rest of corporate South Africa staggered from the effects of recession, Shoprite and its peers powered ahead! Take a look at the 12-month share price for Shoprite (JSE: SHP) below.

This “family favourite” generated 61% in capital returns in the 12-months to 27 July 2010. And that’s on top of the impressive returns generated through 2007 and 2008!

I’m generally a “long only” analyst; but Shoprite’s looking overdue for a big correction. A technical assessment of the share screamed “sell” after the share price cut both its long and short-dated moving averages recently. I think the pullback is already underway, with the share closing 9.1% below its all time high yesterday – down from 9290c to 8440c/share.

There’s also seeing early evidence of a head and shoulders top. The left shoulder and head have already formed, and I’d be extremely suspicious of any bounce from the current support at 8270c. Don’t get lured into a false recovery, because if the head and shoulders pattern forms we could see a massive fall in this retail share – possibly to R80 and then on to R72.90 or so.

Am I crazy to talk about abandoning the retail sector?

Retail sector analysts will point to a range of positives for the sector. Interest rates are low and could be going lower they rage. I say interest rates are as low as they’re going and people remain so indebted another percentage cut won’t make much of a difference.

The analysts will crow over Shoprite’s massive push into Africa. I’ll counter by observing the market has already “accounted” for this benefit – which is why the retailer is trading on a 22 times price-to-earnings multiple when the All Share is languishing nearer 10 times. They’ll try the “buyers” are winning out over “sellers” argument. And I’ll simply laugh.

A senior trader at a stock broker recently joked about the “buying” and “selling” action on stock markets. How can we conclude there’s buying pressure for a particular share when the market demands by its very nature for buy and sell volumes to match?

If you’re into buying and holding for life, then Shoprite is a perfect share for you. But if you’re trading in shorter-term cycles – one, three or even five years – you might want to let some of the steam escape this sector before piling in... I’m going to sidestep retailers for the next half-year at least… 

Read on to find out where I’d rather be...

The “cogs and wheels” of industry are ratcheting up to reward patient investors

I’m looking at one third of the JSE at the moment – and I’ll give you one share from that sector for free… I’m ignoring financials because of the ongoing concern over credit impairments. I’m giving locally listed resources shares a wide berth due to government’s well-documented and ongoing interference in the issue. If you’re smart you’ll know I’m considering the industrial shares – minus the overpriced retailers of course!

The short-term equity market recovery is being driven by the industrial index – mainly by the top 25 companies – but also by the so-called second tier. Since 17 August 2009 this index has delivered 20%, surging from 18 940 points to 22 864 points. The shares we’re talking about include the “who’s who” of corporate South Africa – companies like Aspen, Bidvest, Dimension Data, Imperial, Netcare, Sappi, Tiger Brands and Vodacom.

I’m not going to sing the praises of the Industrial 25 – they’re large cap shares – covered in depth by share analysts and financial journalists. Instead I’ll turn my attention the small and mid-cap universe.

There’s so much potential among these companies I’m going to add three of them to my Red Hot Penny Shares portfolio this September. Sorry – I can’t share these tips on a public platform – because it’s the valuable information my subscribers pay for.

Instead I’ll name drop a share I talked about in the latest Gamble of the Week column in www.moneyweekonline.co.za. Bell Equipment (JSE: BEL) is poised to recover strongly as its clients in the mining, construction, forestry and sugar industries ramp up production.

If you’re in the civil engineering industry the range of Bell products reads like a Christmas “wish list”. You can knock on their door for Articulated Dump Trucks, Wheeled Loaders, Tri-Wheelers, Rigid and Articulated Haulage Tractors, Forklifts, Dozers, Motor Graders, Excavators – the possibilities are endless. And the bulk of this manufactured and assembled at our doorstep, the company’s manufacturing facility in Alton, Richards Bay.

Bell had a shocking 2008/9 year. But at 900c/share I reckon it’s gone as low as it will go. It’s taunting investors to commit for a three to five-year term!

Let the profits roll,

Gareth Stokes
 
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