Is it too late to get into the JSE’s top performing sector?
Andrew Newell, head of business development at Cannon Asset Managers, looks at recent equity performance with some surprising results
Heading into the midpoint of the year, we thought it would be interesting to look at which sectors have performed well so far this year and wondered whether there is still performance to come.
You may well know that resources have performed poorly on the back of weak commodity markets and global economic uncertainty, but who would have thought that the top performing sector would have been technology hardware and equipment?
This sector has rewarded investors with a total return 33.9% for the year to date. That’s no mean feat, and the result comes into greater focus when compared to a comparable figure of 5% for the FTSE-JSE All Share Index.
Interestingly, for followers of Cannon Asset Managers this should come as no surprise. We have been attracted to the information technology sector for some time, although we have cautioned that not all IT companies within the JSE are good investments: some trade on more demanding multiples than others. As a whole though, the sector has performed well. Indeed, the FTSE-JSE Technology Index has returned almost 54% per annum on average over the past three years, against the FTSE-JSE All share Index’s (ALSI) return of 21% per annum, over the same time period.
Perhaps the important question is: where will IT counters go from here? Looking forward, despite the strong performance from the sector already, it remains attractively priced. However, investors ought to exercise caution, as there are a number of companies within the IT sector which appear to be fully priced. Naspers is a case in point. Despite being commonly recognized as a broadcasting or media stock, the majority of the company’s market capitalisation is explained by Chinese-based TenCent, an internet and gaming firm that is being priced euphorically. Certainly, this sector has received a lot of attention recently, the most obvious example being the much anticipated listing of Facebook. What it is also demonstrating to us, is that if you overpay for an investment, regardless of how good the story might be, it carries disproportionate risk to investors.
By contrast, there are certain companies within the sector which remain excellent value. In spite of the share’s price rise of 60% in 2011 and more than 30% so far this year, we view Pinnacle Technology Holdings as still having legs. One of Africa’s largest providers and distributors of Information and Communication Technology products, Pinnacle is a modest business with a market capitalisation of R2.5bn. With its focus towards the “boring” side of the IT business – manufacturing, distribution and support of technology hardware and software – rather than the more glamourous side, Pinnacle is often neglected by investors, which belies the quality of the company. Pinnacle has, however, consistently generated a return on equity of 25% over the past five years, while having grown its top-line revenue at a simple average annual rate of 94% over the past ten years. Despite this stout record, the lack of glamour manifests itself in the form of modest multiples. Specifically, the share trades on a price-earnings ratio of 9.9 times and pays investors a dividend yield of 3.4%.
Another example of a counter that offers value is Datacentrix Holdings, a company which has successfully transitioned into a solutions and services-led integrator, supplying IT solutions from infrastructure and business solutions, to outsourcing and other related IT services. On a 10.4 times price-earnings ratio, and a healthy dividend yield of 6.7%, as an investment prospect, the stock is exceptionally well-placed to reward investors.
We believe that elements of the IT sector will continue to deliver results over the medium and long term. Economic growth is increasingly being driven by a greater use of (and a greater intensity of) information technology and systems and we see this trend persisting into the foreseeable future. Value can still be found in this sector of the JSE, if you know where to look.
Cannon Asset Managers is a niche investment management company that has successfully applied the philosophy and principles of value investing, an investment management approach that has consistently demonstrated a clear advantage over other philosophies. The company has a level 2 BEE rating.
Issued on behalf of Cannon Asset Managers by Cambial Communications
For further information, please contact:Cannon Asset ManagersAndrew Newell, Head of Business DevelopmentTel: +27 11 463 3140Cell: +27 83 248 2711
Cambial CommunicationsGillian FindlayTel: +27 11 486 3561Cell: +27 82 330 1477