Peter Lynch is a legendary stock investor. In his 13 years at the helm of Fidelity’s Magellan Fund, he managed a 29-percent average annual return and outperformed the S&P 500 index in 11 out of those years. Perhaps more importantly, he explained his approach to investing in two entertaining books: “One Up On Wall Street,” and “Beating the Street.”
In these books, he instructs readers to “invest in what you know,” and to tune out macroeconomic factors and focus on understanding what makes the underlying business tick.
He also gets pretty specific about criteria to use when evaluating the quality and value of a business.
Lynch loves small businesses with consistent earnings growth, little bank debt, and low price-earnings ratios.
Here are five African stocks that might tempt him if he should turn his focus toward the Johannesburg Stock Exchange.
Global trade patterns are in a state of flux. The world’s main manufacturing centers have moved from Europe and the U.S. to Asia, and rising incomes in the developing world have created consumer bases in previously ignored regions.
Logistics companies like Santova profit on their unique ability to advise clients on how to efficiently move goods from one place to another in this rapidly-changing environment.
Lynch would love the company for its rock-bottom price-earnings ratio (5.7). He’d also like that it has strung together three straight years of earnings growth. Profits have increased at an annualized rate of 31.9 percent over the past five years.
South Africa’s housing deficit is enormous and continues to grow. It’s estimated that 12 million of the nation’s citizens lack adequate homes, equating to a shortage of approximately 2.5 million houses.
Calgro M3 is in the business of meeting this need. They purchase land, get it properly zoned, develop it and build homes on it. Frequently, the end customers are government-backed housing programs, but they also work with private developers.
I think Lynch would be intrigued by its small size (approximately $83 million) which has kept its outstanding earnings growth off the radar screen of many big institutional investors. A growing cash pile is a nice treat, too.
With more Africans enjoying more disposable income, the demand for home furnishings has soared over the past 15 years. Credit retailers have thrived in this environment.
Lewis is South Africa’s largest furniture chain. The company also operates 59 stores in Lesotho, Botswana, Namibia, and Swaziland. They cater to the low to middle income segment of the market, selling a wide range of furniture, appliances and electronics with attractive financing.
Peter Lynch would love the business for its simplicity. They sell furniture on credit. It’s not too difficult to wrap your mind around how they make money. He’d doubtless also be impressed by the company’s four-year streak of growing earnings and its undemanding 6.6 earnings multiple.
Increasing demand for consumer goods means there’s also increasing demand for stuff to package them in. Somebody needs to make all of those boxes, containers, bags, and tape, and companies that done quite well for themselves over the past decade.
Transpaco traces its history back to the mid 1940s. It started as a paper company, but has grown into South Africa’s largest manufacturer of plastic bags. Thankfully, it also recycles the unsightly things.
In addition to its small size and earnings multiple, I think Lynch would find management’s efforts to reduce debt pretty appealing. Transpaco’s long-term debt load is now just more than half of what it was five years ago and it represents less than 10 percent of equity.
The South African consumer is not in a happy place these days. Raises have not been keeping pace with inflation, so imported goods have become discouragingly expensive.
One would think that car dealers would be struggling to keep their head above water in such an environment. But Combined Motor Holdings, South Africa’s largest auto dealer, is enjoying robust earnings growth with the help of industry-beating sales, repair revenue and income from the sale of auto insurance.
I think Lynch would be adding this one to his portfolio thanks to management’s recently announced share buyback program, a balance sheet with nary a trace of interest-bearing long-term debt, and a four-year streak of increasing earnings.
What other stocks do you think would be on Peter Lynch’s watchlist? Let us know in the comments.
Ryan Hoover is an investment analyst with Africa Capital Group and the founder of InvestingInAfrica.net. Contact him at ryan@investinginafrica.net.
