To market, to market to buy a fat pig. Yesterday is old news, there is nothing that you can do it about it now. In my man flu haze and in our traditional style of observing from a distance I was once again surprised by the power of social media. Twitter “had” the news of an explosion in New York a full quarter of an hour before the television flashed the news. The inter webs is the new news, the inter webs no doubt through the power of people will continue to be the best (if not immediately reliable) form of news. Now of course a gas explosion in New York is more serious when there are multiple injuries and three lives tragically lost, and in particular you can still understand the skittish nature of the average New Yorker with 9/11 still “fresh” in their memories.
But the point I wanted to make is that news as we know it has changed, the delivery mechanism was made possible by private enterprise (the hardware and the software) and through the urge to put “pen/quill” to paper. We are essentially all reporters. If you have a smartphone and an internet connection you can offer an angle that you can only see from an individuals point of view. And thank you to free enterprise for having been allowed to thrive to build devices made by the handset makers and the ability to set up connections to a global network. Truth prevails when more sides tell the story. Of course it always depends on what your version of the truth is.
The very meet-the-truth issues surrounding the Russian desire to annex the Crimea from the Ukraine (and do they stop there?) is one that haunts the Baltic States (Crimea occupation casts shadow of 1940 over Baltic nations) and has made them the most vocal in trying to push back against Russia. Using their new found European strength of course. But the question of second class citizens or non-citizens inside of Latvia, because they are of Russian origins, something is not right there either. Sigh, to try and understand the history, the politics and then to suggest that it is a reason to do x or y is impossible for mere watchers such as ourselves, we do not have the emotion of either being displaced or forced to be living somewhere they don’t want to. That feeling however is real to many South Africans, luckily twenty years into democracy we are still healing a little each and every day.
Enough of that, markets in New York started worse and then turned higher through the session, leaving the local market without the opportunity to recoup the losses through the days. The copper price falling hard did little to draw enthusiasm to the resource companies, those continued to fall heavily and be amongst the majors down on the day. Anglo down 1.7 percent, BHP Billiton down 1.3 percent, Glencore Xstrata down 2.26 percent.
But the other side of that in the commodities complex are the gold stocks which continue to defy the chattering classes and the talking heads, myself included, as a collective the gold stocks have returned an earth shattering 56 percent plus return since we arrived back at our desks on day one for the markets for the year. Yes, the returns delivered by the gold stocks has absolutely crushed the Rand Gold price, ticker GLD. GLD has had a good time of it, do not get me wrong, up 17 and a quarter this year alone. But I guess that is the extent of the leverage that the gold miners have to the Rand Gold price, since the beginning of the year Harmony is up 44 odd percent, Gold Fields only around 33 percent, with Anglo Gold Ashanti up a whopping 66 percent! That falls well short of the performance of Sibanye Gold, which is up 97 percent. Amazing.
But of course these companies have been under huge pressure for a decade plus, over ten years adjusted for the Sibanye unbundling, Gold Fields has halved. Harmony is down 64 percent. That is in Rands. In Dollars Gold Fields is down 65 percent over ten years, the Harmony Dollar ADR is down 76 percent over a decade. Yowsers. If Harmony were to get back to the price a decade ago in New York, the stock would have to quadruple from here. Which of course would mean that profits would have to quadruple, at least, right? Current profit forecasts as per the analyst community data that I have access to suggests that Harmony could be making around 330 ZA cents EPS by the middle of 2016.
It is really tough to value companies where you do not understand the underlying demand and supply fundamentals for their core product. You cannot own everything. Even more pressing though for us, when making decisions on what to buy and what not to buy is looking for steady and ever increasing earnings in companies that you can reliably understand. Most companies are held captive by various cycles, different for each of them, interest rates being a core one of course that directly impacts the profitability of retail and financials. Benjamin Graham said that you should look through the cycles and take a ten year view. He of course is the doyen of value investors, not everybody has that sort of time frames, mostly longer term investors not being badgered every three months for a review.
What prompted the discussion about cycles is that we were just having a look in the office at the dire situation at Evraz Highveld Steel and Vanadium, who released results yesterday. There have been three losses out of the last five financial years. No dividends. The stock price high over five years has been as high as 103.95 ZAR and as low as 10.01. Yowsers, currently down at 10 ZAR as we speak, a drop off of 27 percent today and five year low. And basically this business is for sale, even if that has not been publicly stated, sort of, you have heard of Nemascore? Not too much information on Nemascore, nor where they are going to get the 1.2 billion Rand to buy the stake, for an entity that is not that well known. We shall see.
It trades below book value. Battling against an overcapacity in the sector from cheaper manufacturers globally. Roughly 20 percent exports, so they are in large part held captive by the performance of the local infrastructure roll out. The steel price? That has been trending down over the last five years. So in short, you want to avoid sectors that have peaks and troughs too far apart. It is easy to say that you should have clearly ignored this business in hindsight. Including Evraz. Who paid 11.40 USD per share back in 2007. They (Evraz) then extracted 32 Rand a share in 2008 in special dividends (call it around 3 Dollars) and are now sitting with an asset that is worth less than 1 Dollar a share. Chelsea FC might have been the money sucking beast, with that 173 million Pound per annum wage bill (and that was last season), but this (the local steel business) seems like a much bigger problem for Roman Abramovich than Fernando Torres’ goal scoring prowess. Torres of course has not found his scoring ways again, 8 goals last season and 4 so far this season. Which is a lot less than his 24 goals in 33 appearances for Liverpool in 2007/2008.
We have heard that there have been people milling around at Evraz Highveld, it could all be hearsay, but it (another bid) is in the public domain. Perhaps buying steel mills for a whole lot less than it costs to build them is an attractive proposition for someone with deep pockets and long time frames, but with higher than usual risk tolerance. Too risky, avoid. Another reminder that there are many more companies NOT to own rather than identifying the companies that you must own. Eliminate sectors and industries that you do not want to own, that will narrow the field of investable companies.
Home again, home again, jiggety-jog. Softer Chinese Industrial production numbers and retail numbers from the same territories have again put the cat amongst the proverbial pigeons. Even though of course there was a corporate default from a high flying solar panel producer just Friday. Most of the corporate debt market in China is backed by the state, because most of the issuances are majority state owned businesses. I guess we can get anxious about it, but I am guessing that the Chinese are on the case.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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