'ICU' portfolio full of ailing shares
Wall Street reached new peaks last week. Even though July's employment numbers in the US were not quite as high as the market had forecast (raising the tempo of the "Will he [Ben Bernanke] or won't he taper in September?" debate), the cumulative effect of job increases over the past year on the property market and household spending is lifting confidence levels and is reflecting strongly on the valuation of stocks.
According to the European Central Bank president, Mario Draghi, Europe, too, is showing signs of stabilising. Analysts expect the region to move out of recession in the final quarter of the year. China also surprised the market, reporting manufacturing was expanding again - well only just - but it was good enough news for traders to speculate that the administrators of the world's second-largest economy were turning up the expansion dials.
The JSE moved to within touching distance of its May high, slipping back marginally on the US jobs miss. On the year, in US dollar terms, the JSE all-share index is lagging the Wall Street horribly, but in local currency it is up by a respectable 6%, while over three years the returns are a more impressive 47%. Averages, though, are deceiving, and there are a whole cluster of once-influential companies that over the past few years have hindered the market's overall performance.
I have included 12 of these shares in my 'ICU' portfolio; a selection of businesses that, at one time or another, were dominant in their respective industries and were considered the bluest of chips on the JSE but are now languishing in the intensive care unit, struggling with a series of health issues, from increasing costs to weak management.
Leading the category are mining counters Anglo American (down by 24% in three years), AngloGold Ashanti (-57%), and Anglo Platinum (-50%). Last week, new Anglo American CEO Mark Cutifani confessed that the yields on many of the group's projects were far below expected returns.
AngloGold Ashanti and Anglo Platinum have been plagued by uncontrollable cost increases, safety-related stoppages and unlawful strikes .
In a recent media interview, Anglo Platinum CEO Chris Griffith revealed that the cost of producing an ounce of platinum on the group's mines would rise to R17000 compared with the spot price about R14400. Low inflation, the threat of rising interest rates and improving global sentiment have hammered the gold price more than 25% this year. Forecasts are that the price could head even lower. It is not as though all mining shares have gone backwards. BHP Billiton has underperformed the broad market but is still up by 27% over the three-year period.
Local oil producer Sasol has gained 62%, well ahead of the all-share index's climb.
Two companies on my list, Pick n Pay (-15%) and Altron, (-24%) are managed by the offspring of the founders, but in both instances the second generation have failed to emulate their fathers' triumphs. At one time Pick n Pay boasted the most successful compound growth record in the history of the JSE and its price rating reflected it.
But in recent years the food retailer has relinquished its leadership. For comparison, in the past three years Shoprite's price is up by 83%. Cheap imports have challenged poultry producer Astral (-18%); slowing local demand, soft international steel prices and a bagful of legal battles have swamped ArcelorMittal (-59%); falling advertising budgets in the print world have vexed Sappi (-25%); the electricity crisis and a downturn in the global aluminium market have exasperated Hulamin (-53%); government interference, wretched management and a series of failed initiatives have battered Telkom (-40%); Murray and Roberts (-41%) has suffered from delayed government spend on infrastructure, while overextended consumer borrowing has increased the risks on African Bank's loan book (-57%).
So far this year only Hulamin and Telkom have shown any signs of life, bouncing off their lows.
Somewhere, hopefully in the not too distant future, the rest of the portfolio will start improving as management attempts to apply cures. A handful of brave money asset managers trust it will happen soon and have backed their views with lots of money.
My friend, Wayne McCurrie, often reminds me the cycle will change, and he is probably right, but I don't quite believe it yet.