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Market Scorecard
Yesterday was another green day for markets. The day started off with some poor Chinese data, but that was quickly forgotten on further news that we are "almost", "only have small details to iron out", "very close to", a trade deal between China and the US. It feels good going into December and the summer holidays with the tailwind of record high US markets. Last year this time, the market hit a wobble at the end of September, and then had a horrible run up to Christmas where the market was down around 13% between the 1 December and the 24 December. Can you even remember what the reason for the drop was?
Does Vestact think the current market strength is sustainable? Yes we do. In the current environment, the market doesn't look overly expensive. The WSJ estimates that the current P/E of the Dow Jones Industrial Average is at 21, with a forward P/E ratio of 18.5 and a current dividend yield of 2.2%. High by historical standards but not out of place when you consider how low interest rates currently are. The dividend yield is a big one to consider because that is real money being paid out by companies. With global interest rates moving lower, a dividend yield of 2.2% is good going.
On top of that, Trump's re-election is heavily dependent on having a strong US economy and a high stock market. He will be doing everything in his power to make sure that things go well till at least the elections in November 2020. As we say in the office, it is always better to be in the market than out.
Yesterday the JSE All-share closed up 0.21%, the S&P 500 closed up 0.42%, and the Nasdaq closed up 0.66%.
Company Corner
One thing, from Paul
Food and clothing retailer Woolworths is still a Vestact recommended stock in local portfolios. It has a market capitalisation of R57 billion these days, and is still in the JSE Alsi 40 index. The share price is at R54, compared to its all-time high of R103 in November 2015. In other words, we are still hanging in there, after four years of negative returns! Having said that, it's off its recent lows, of R45 a share.
There are two principal reasons for the slump over the last four years. The first was that the management team under CEO Ian Moir decided in 2014 to buy department store group David Jones in Australia for R21.5 billion. That required a fairly significant rights issue, which we all followed. That operation has struggled since day one. After much restructuring, business model tweaking and store refurbishment, the value of that asset has been written down in the books to R9.7 billion.
The second reason for the value loss has been the weakened state of consumer demand in the South African economy, given the stagnation in the labour market. The high-end Woolies food business continues to hold up quite well, but clothing sales have been tepid. In addition, a number of food and clothing retail rivals have upped their game.
In a trading update released on Wednesday, Woolworths reported food retail sales up 6.5% compared with like-for-like sales ended November 2018. The South African fashion, beauty and home unit grew sales by 2.8%. David Jones sales declined by 2.1%. Sales at the Elizabeth Street flagship store in Sydney (roughly 10%-15% of David Jones sales) were still affected by renovations.
So, what to do? In August 2018 I wrote a similar update to this one, arguing that "the Woolworths share price has come down to the point where all the bad news is baked into the price. We should all simply hang in there and wait for better days." That advice still seems sensible. At least the overall business has improved, and the write downs have slowed. Let's see how festive season trading goes.
Our 10c Worth
Byron's Beats
Shares like Nike, Apple, Starbucks and Google have all gone through prolonged periods of poor performance. We have often used these periods to load up on the stock because, in our opinion, the long term story is still in tact.
You may not have noticed but consistent overachiever Amazon is going through a similar period. Take a look at the 5 year share chart.
In August 2018 it peaked above $2 000 a share. Over the last 18 months the share is basically flat. But during that time online retail continues to thrive and Amazon Web Services gets more and more profitable. We are seeing a price to earnings compression here. Goldman Sachs says that in their books Amazon represents one of the best risk/reward investments in the internet space at the moment! In our opinion, this is a rare opportunity to load up on this quality business.
Michael's Musings
Have you ever bought music online, to store on your Apple library? How about buying an e-book, which you use on your Kindle? Those are fairly common things to do these days. Now, how about buying digital clothing. No, not shopping online for your next outfit, and then having it delivered, actually only owning the clothing in cyberspace.
This company in Scandinavia will sell you digital clothing because it is more environmentally friendly. You send them a picture of yourself, they will then fit the digital clothing to you, and then you have a picture ready to be uploaded to Instagram. Now there really is no reason to leave the house!
Read about it here - Digital clothes are fashion's freaky new frontier
Linkfest, Lap it Up
Another country is in the process of implementing a revenue tax. The idea is to force companies to pay tax based on their revenue gained from sales in a particular country, instead of paying low tax rates due to elaborate international structures - Czech government approves digital tax aimed at internet giants
Alphabet's project Loon has just signed a deal to bring internet to 6 million people living in the Amazon, in Peru. If you have forgotten, Loon is a division of Alphabet where they send up balloons to help connect people in rural locations to the internet - Loon is flying the internet to rural areas.
Signing off
It is Thanksgiving weekend in the US, which means that their market is closed today and will only trade for a half-day tomorrow. That means there will be limited amounts of economic data out and low trading volumes. A quiet day to help us get our shopping lists ready for Black Friday deals tomorrow? The JSE All-share is lower this morning and the Rand is trading at $/R 14.75.
Sent to you by Team Vestact.