I was having a grumpy morning. I had just read an excellent piece in Business Day by Allister Sparks, pointing out the extreme insanity and likely corruption underpinning the proposed R1 trillion nuclear power acquisition programme (https://tinyurl.com/o397d6w) Sparks, as usual, has his finger right on the button, warning that not only would this transaction make the Arms Deal look like small change, but also very likely bankrupt the country.
As I sipped a cup of coffee, I sighed in frustration to myself, “Heavens above, what do I have to do to escape the clutches of this crooked, corrupt ANC government? Is there no antidote to their predations?”
For once, the answer came quickly. I should build a share portfolio of companies that were themselves profiting from ANC incompetence. For this, I would need a general list of sectors that the ANC was wrecking, and I could then look for appropriate businesses.
The list was not difficult: health, education, energy, transport all came quickly to mind. State hospitals are dirty, inefficient and people try to avoid them if they can and go private. State schools function in a very patchy fashion; whilst there are some examples of excellence, there are many more of disgraceful conditions and dysfunctional teachers. Like hospitals, people go private if they can.
This is going to be easy, I thought. A vision of outsized returns swam into my head. I might even launch a fund based on this anti-ANC position. I could call it something like the ANC Antidote Fund.
I reached for my computer to get some quick prices and P:E ratios. The P:E is key to investing – for those of you unfamiliar with the term, it stands for Price to Earnings. In other words, if a share costs you 100 cents and has earnings of 10 cents, the P:E is 10.
So what, you ask? Well, it also means that, all other things being equal, it will take 10 years for you to recoup the cost of your investment, and only after that can the investment start making money for you. The higher the P:E, the more expensive the share and, as GIBS Finance Professor Adrian Saville reminded me the other day, nothing destroys an investment like overpaying for it. Saville points to companies like Naspers, SABMiller and Richemont, all of which are superbly run and have defensible market positions, but also have what he calls “demanding” P:E levels.
With that caveat firmly in mind, I went to the healthcare sector. Two big players were obvious choices: Netcare and Mediclinic. But hold on – both have P:E ratios above 21. We’re in Adrian Saville’s “demanding” territory and I can’t wait 21 years to begin profiting from my ANC-driven insight.
OK – education, then. There’s a group called Curro, which specializes in building and operating private schools where fees are not exorbitant. I typed “Curro” into my Google Finance portfolio tracker and…horror of horrors, its P:E is upwards of 340. That’s not just demanding, it’s insane! It’s also a signal that investors don’t expect earnings growth, but are looking instead for capital growth in the share itself, although that’s a subject for another day. Whatever your view, these are levels where analysts reach for phrases like “overbought” and “fully priced” and Curro would certainly not be a candidate for my ANC Antidote Fund.
Slowly it began to dawn on me. My idea was not at all original. It had in fact been spotted and already put to good use by hundreds, if not thousands, of other investors, all desperate to profit from the ANC’s incompetence. After all, with South Africa’s high taxation, poor economic growth, rising inflation and frighteningly weak rand, everyone’s looking for an edge.
Right, I thought, back to the drawing board. There is a certain sense of comfort, if nothing else, when you realise that your thinking is not at all original, but that it remains nonetheless a good idea because a large number of people are using and profiting from it. Clearly, though, I would need to find the companies for my Antidote portfolio much earlier in their lifecycle and get in ahead of the crowd.
Perhaps the energy sector might be the place to look, I thought, and why not on the JSE’s Alt-X? That is where growing companies seek to list, before making the arduous leap to the JSE’s main board. And yes, there is a company there that might fit the bill. Except it has just listed on Alt-X and has yet to declare any earnings. So it has a P, but no E, if you see what I mean.
I’m not going to tell you its name. I don’t want to be accused of abusing this platform to “punt” a particular company, but I also haven’t done enough homework on it yet to recommend it. I’m sure though that if you’re familiar with the markets, you’d be able to find it quite quickly.
But here’s a promise: I still think my ANC Antidote Fund is a good idea, and I will assemble a small portfolio of shares based on it, provided I can acquire them at a reasonable price. Once I have bought the shares, I’ll disclose them to you, including the purchase prices and then we can track them as they – hopefully – grow.
Now all we have to do is believe that the ANC will continue to be as incompetent and destructive as it has been these last 20 years. Sadly, that looks like a racing certainly!