So been a tough couple of weeks on my portfolio side. Often when things go badly you think “do you really know what you are doing?” also could convert into “I can’t sleep, I’m down 20% in a few weeks.” So just wanted to talk through my mindset and bit on market movements so you can hopefully gain something.
Trading
So I am friends with a few portfolio managers and hedge fund managers and we talk shares regularly, some of the more recent one are ACL and Grinrod shipping amongst others.
ACL - Steel prices through the roof company been making big loses and now moving to profits. So I had a read of the financials, yes loses are improving, might even get to profitable at the current steel price, BUT you are making the assumption prices stay high. Why did steel go up? Because during lockdowns globally steel companies shut down plants (very expensive to keep running), because capacity usage was to low, and to turn the plants back on and get to operating temperatures takes months and large expenses. So capacity comes online slowly demand jumps quickly and there is a shortage pushing prices sky high.
Trading opportunity yes! Could have scored big getting in early, issue is if it drops 20% it could keep going, when supply changes hard to know and because only profitable at unsustainable prices not a good long term buy.
Grinrod is a similar story, lockdown stopped shipping in its tracks, large amounts of ships were decommissioned, then the demand returned extremely quickly and again to get a new ship takes a while (2-3 years to build), and this pushes prices skywards.
Trading opportunity yes! Again when will demand slow down or ships come online, hard to forecast exactly . As companies are hording stock as they scared of lockdowns, so when there is a drop in demand that drop will be quick.
I definitely missed some tricks, because when I look forward I can’t see value, but spotting trends and thinking about short term impacts on profitability can make you some good returns, but it is risky. The older I get the more I will but trends that are sustainable, things that will have a big jump now, but will keep going.
Platinum
Currently the market is pricing platinum as a short term trend, saying Anglo’s plant issues and floods in North America slowed supply pushing prices, and with cars sales jumping and green energy being flavour of the month platinum prices have jumped. Platinum group metals are being used in more and more innovative green solutions, like New York is changing regulation for spaces of a certain size, with now require platinum on the cathodes of a zinc-air system to reduce carbon footprint. Hydrogen energy being posted as the future of green energy. All the while, platinum and palladium are still used in the current cars and all in fuel cells. While speculative based on future tech, while you wait you get a 7-10% div with good potential for future capital gains.
Investing
So lets look at Hyprop, although I am sure have flogged this horse a few times in writing. Firstly NAV R74 and price R26.5 (time of writing). Market cap 7.9bn. Distributable income six month to Dec 483m, with a direct impact of covid of 244m (113m relating to Eastern Europe). EE is still struggling with covid, so lets assume only recover 130m of that impact in the second half. All else equal would have R1.096bn distributable earnings. Or a dividend yield (distributing 76%) of 10.5%. This is 10.5% having no dividend from European portfolio, losing R20m on African portfolio (which is for sale) and SA portfolio income being half of pre-covid levels.
Then they have done renovations and improvements, started adding solar to malls reducing costs. Edgars has gone under so they can find tenants that now will pay rent. Reduced debt substantially (Almost R1bn) saving costs, further refinancing African debt saving R6.4m a year.
The share was doing well until they did a “private placing”, where shares were oversubscribed at the current market price. Indicating high institutional confidence. From a signaling side, why would Hyprop issue equity? They never announced why. Since then the price has dropped 10%.
So I called them and spoke through few issues around debt, EE and the rights issues. Management just wanted to issue equity incase the 3rd wave of covid was bad in SA. Don’t need it, no planned use. It does help the debt to value ratios as well.
So if you look forward a year or two. SA portfolio income pre-covid alone for was R1.5bn which translates to 18.8% dividend yield at the current price. If you add Europe and get rid of Africa gets close to a 25% dividend yield on a normalised basis. Will it take a year or two to normalise, yes. Why don’t I lose any sleep if it goes down 20%, because while I wait I get a 10.5% dividend on something that can only get better with time.
The key difference between trading and investing, is for trading you need to have good timing. For investing you just need to buy the right asset and wait. You need to picture where you will be in 2 or 3 years time, and I picture collecting 18-20% dividend a year with a 100% capital gain. Whether that takes 2 or 3 years, i am not to worried because the whole time I get 10.5% while I wait. Always look at where it will be in time, and don’t worry about now.