To market, to market to buy a fat pig. Seven down and five to go. That is for months of the year that is. I asked Byron this morning when he walked in, why do we define ourselves like this, month to month and then year to year? Particularly when investing. Why set yourself a finite amount of investing time, trying to jump trains and catch the fastest one? Perhaps the train analogy in light of the horrific Spanish crash (that driver was apparently late and going around the bend at twice the normal speed) is not the right one and insensitive.
But I think you understand what I am trying to say. Investing can change, the platforms and the data dissemination evolve, but ironically the companies evolve a little each and every day along with the rest of the world. Those companies that find themselves unable to evolve in a changing world, either because their product is not needed anymore, or something better came along. As investments, these are businesses that you have to avoid at all costs. I can imagine that businesses like E. Remington & Sons and the Volta Graphophone Company which were once at the top of their respective worlds would have thought that "things" would change a little slower than perhaps they anticipated towards the end. Avoid these ones.
But that doesn't quite answer why we set finite investment times. It should in theory be forever. That phrase is sometimes attributed to Warren Buffett, who in the 1988 Berkshire Hathaway Chairman's letter said: "In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." But sometimes that is taken out of context, because he says in the next line, directly after that: "We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds." Getting anxious about stocks having done "too well" and the price having gone up a lot is perhaps the same behaviour as getting worried about a company that is currently in a funk, and the share price is down too!
So trying to identify businesses which have the long term enduring qualities that you look for in a solid investment is the job half done. Thinking without blinkers and sticking to your strengths, avoiding your weaknesses. Investing is however not like trying to cut hooking out of your batting range of stocks, but rather than the urge to go for that specific shot, being able to duck regularly. When markets are flying there is a temptation to go outside of your comfort zone. The basics have always applied, and will continue to apply. There is a lot to be said for keeping the investment philosophy simple!
Mr. Market yesterday had loads of different data points to look out for yesterday. First off, around 14:15 local time here in Jozi there was the release of the ADP employment data. That number was a modest beat, 20 thousand more than anticipated, it seemingly does not make the market budge too much nowadays. But a solid enough beat, I was in the middle of a whole lot of "things" going on, and was looking at the screens from a distance. My desk is a distance. I guess the most pleasing thing was that there were jobs across all sectors of the US economy, small, medium and large businesses adding jobs. This is much better than the July read this time last year. August was a shocker. Remember that the sequester was supposed to put a lid on job creation, as a result of Washington D.C. uncertainty? Remember?
And the sequester and automatic cuts were also supposed to put a lid on the second look at US second quarter GDP growth too, but that comfortably trumped expectations. Gross Domestic Product, second quarter 2013 (advance estimate). James Pethokoukis had a middling view, remember that he is not exactly a fan of the current dispensation: America's "not-horrible" economy. He has an interesting take, more or less. A better take is from my old favourite, Cullen Roche: A Closer Look at the GDP Report. Private investment is leading the charge. I wish the same could be said for here.
And then perhaps the one that everyone was waiting for, the FOMC statement which is always available on their website, just after eight local time, here goes: Federal Open Market Committee. The long and the short of it is that the Fed are going to continue buying 85 billion Dollars worth of bonds and they will continue to monitor the economy for signs of strengthening, or weakness. Interpret the Fed Speak in any way that you want, there are way too many people anxious about it.
Oh dear, I can see it already. Chinese PMI, at least the official release this morning clocked a positive number, over fifty, indicating that overall manufacturing activity is expanding, but is at a 11 month low. On the official data at least. Over in Europe, where the more "believable" data is, French PMI missed slightly this morning, and more importantly it is trending towards 50. Just a fraction below that!! We keep saying green shoots are appearing in Europe, but get nothing but a blank stare and a snigger in return. Well...... the overall PMI Europe figure clocked a number above 50 for the first time in over 24 months! I am always amazed that facts and figures from one part of the world is believable and others seemingly not. That smacks of some sort of ..... racism?
What happened to Visa last night? The stock was seven and a half percent lower on the session, giving back most of the positive action over the last 10 weeks. It has all to do with the capping of swipe fees of specifically debit cards, of which Visa has nearly a one third share in the US. Cast your mind back, the original fee was set at 12 US cents, but the payment processing companies managed to hike that to 21 cents. Yesterday a court, a District Court, overruled the US Fed's authority to raise the fee, at the time. It seems like a knee jerk reaction to me, nothing is final. Nothing is ever final in terms of rules and regulations set in stone by politicians. It changes and evolves. We will see what transpires, but I doubt that it is a huge deal for now, but would have a fair impact if reversed.
Byron beats the streets
This morning we received a nice looking trading update from MTN for the 6 month period ending June 2013.
"Shareholders are advised that MTN expects an increase of between 20% and 25% in headline earnings per share ("HEPS") for the six months ended 30 June 2013 when compared against the previously reported corresponding period."
The HEPS for the six month period are positively affected by foreign exchange gains of approximately R1.0 billion compared to foreign exchange losses of approximately R1.5 billion in the prior year related to some of the group's subsidiaries resulting in markedly lower net finance costs.
As you can see from the update, there were big currency swings, let's look at the past numbers in detail and see what we can decipher. Last year headline earnings for the 6 month period came in at R9.911bn. If you add the middle of the range 23% we should expect R12.19bn for the period. That gives us an increase of R2.28bn, R1bn of that as a result of the currency swing. If it weren't for the currency swing we would have seen earnings growth of 13% which is still very acceptable for a company of this size, especially when everyone was calling them ex-growth a few years ago. Maybe they are now ex ex-growth.
On a per share basis we saw 537c this time last year. With this release we should expect around 660c. The stock is trading at R187 as I write. If you annualise this number which is a fair to conservative assumption for MTN, the stock trades on 14 times this year's earnings. To put things into perspective, telecommunication companies in developed markets are trading on much higher valuations, probably because of their impressive dividend yields. These companies are spewing cash. What I am trying to say is that MTN is cheap in my opinion, especially when you look at the potential growth in the regions that they operate in. I guess that is why the stock would also afford a bit of a discount, those regions can be very risky.
And how do you analyze currency swings? Well these things happen, sometimes in your favour, sometimes not. Enjoy the benefits when they come around and hold tight when things go against you. It is the average growth over a long period of time, say 5 years, which is important. We will look at the stock in more detail when the results come out, probably later this month.
Home again, home again, jiggety-jog. Markets are higher again, perhaps a combination of Fed purchases and European green shoots and a Chinese relief. There is of course an ECB meeting today, although it eats into valuable watching time for the US session. And the ashes crucial (no it isn't, it is over already, not so?) test starts today. I got the Mooi River Plaza whisper number from a little birdie and it is a record high. So perhaps "things" are not as bad as they seem.
Sasha Naryshkine and Byron Lotter
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