BUSINESS NEWS - At the end of October 2015 Woolworths was one of the most loved stocks on the JSE. In a little over seven years its price had climbed from under R10 per share to close to R105 per share.
Since then, however, the stock has slid all the way back to its current levels of about R52 per share after the company’s acquisition of the David Jones department stores in Australia put it under pressure. From being a market darling just 22 months ago, the retailer has very quickly fallen out of favour.
Glencore is another local large cap that isn’t in investors’ good books at the moment. Questions about its operations in the Democratic Republic of Congo (DRC) and news that the US Department of Justice is investigating it under the Foreign Corrupt Practices Act have made the market wary.
Read: Glencore subpoenaed for money laundering and corruption
For value investors, however, these two stocks may be presenting interesting opportunities. As Schroders fund manager Nick Kirrage told the Allan Gray Investment Summit in Cape Town on Tuesday:
“Value investing is doing the thing that sucks – the thing that makes you uncomfortable. Like many things in life, such as going to the gym, whatever is the hard thing tends to be the rewarding thing. As value investors, we look for the thing that feels uncomfortable.”
Woolworths and Glencore at the moment definitely fit this description. The question for investors is whether the potential risk-reward pay-off on these stocks is now in their favour.
Woolworths
The chief investment officer at Perpetua Investment Managers, Delphine Govender, believes that Woolworths represents “a classic value investment”. It is currently the third-largest holding in the Perpetua SCI Equity Fund.
“It’s a fundamentally good quality business that has an enduring business operation in South Africa that is not going away,” Govender said. “It doesn’t matter who the president is, or whether Amazon comes here, they have a strong moat.”
The company did, however, bring its own pain about through the buyout of David Jones.
“They overpaid dramatically for an asset in Australia in a declining business model, then promised synergies that never came,” Govender pointed out. “So the share price has fallen over 45%.”
Woolworths’s top-line growth has been severely affected because of the David Jones purchase, but Govender argued that the South African business is stronger than many people believe. She believes that the market has punished the share because it is obsessed with short-term numbers.
