Podcast: Managing fallen angels

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Managing fallen angels

Those once unstoppable high flying stocks that have come back to earth with a thud, now what?

We have a lot in our market right now; Aspen (JSE code: APN), Steinhoff (JSE code: SNH), MTN (JSE code: MTN), EOH (JSE code: EOH) and many more.

Firstly understand the difference between cyclical and non-cyclical stocks. The former is resources, construction – those sectors that will always experience boom and bust and here we should really be long-term trading them rather then bottom draw investing in them.

Secondly is to be careful when buying our high flying, unstoppable non-cyclical stocks. I may love a stock but if it’s above my idea of a fair rice I simple won’t pay the price. I wait, sometimes waiting years, for prices to be at my levels and then I’ll buy. Sometimes like with Richemont* (JSE code: CFR) this works well when I was buying in the 80’s some two years back. Other times like Woolies* (JSE code: CFR) I was buying from around 8850c all the way down to 6250c odd and then I stopped as I had full weighting and yet the stock went still lower. So manage the price you pay, you do not want to be the person who paid +R440 for Aspen and if you were ideally you want that to be one of many price points you paid with an overall much lower average price.

But that all said these unstoppable angels do sometimes fall from grace, so lets delve into that.

The first question is if this is naked fraud or horrid business that we (the market) had missed. With Steinhoff the answer was an easy yes to fraud. With MTN the answer is more complicated but my view at the time of the first Nigerian issues was that this was a massive failure on the part of management and that markedly changed the investment case – so I exited.

Woolies the issue is over paying for David Jones and again messing up on women’s fashion. Both repairable and not likely to be terminally damaging, albeit most definitely expensive.

But what of Aspen? I think that the stock had got well ahead of itself with a PE of almost 40x just two years ago, wildly expensive but supposedly justified by HEPS growth that was around 30% a year. However nothing grows at 30% a year and this is the error I think the market has made. Aspen is maturing, all successful companies mature and when they do they rerate in terms of valuations (PE) but with Aspen the market seems to have been caught by surprise.

So in short;

  • Cyclical stocks are for trading.
  • Buying price is very important. Don’t overpay and ultimately stagger buying over many years (decades) to ensure a decent average price.
  • Also stagger buying across many stocks, you don’t want all your investment concentrated in a few stocks or sectors.
  • Ask if this is as a result of a management error that is not terminal? If yes stay the course and maybe use the sell off to pick up some more – but again be carefull of being way over weight a single stock.
  • Ask yourself if the fall off just a rerating / maturing of the business or as a result of real damage to the company (fraud, horrid management, etc.).
  • Go back and check you initial notes from when you first bought the stock. What’s changed and does that change make for a better (albeit different) investment or worse?

Lastly, never just shrug and say “how much worse can it get?”. It can get a lot worse, Steinhoff offered a +2000c exit last December when the news broke. Now it sub 300c.

Last last point. Within a diverse portfolio not everything is always going up – unless it’s a stonking bull market.

* I hold ungeared positions.

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