Experiment 2: Picking A Winning Stock Investment
I once heard a story that a top stock market trader had a competition with an average Joe at picking a share portfolio. The market trader used his extensive knowledge of the markets, statistical analysis and research of global and industry events affecting the markets. The average Joe took a newspaper list of all the stocks and shares and closed his eyes waved his finger a few times and stabbed it into the page. Whatever he landed on would be the stock that he'd pick. This was repeated until each of the competitors had a small portfolio of stocks in which to invest. Legend has it that a year later, Joe had outperformed the expert trader thus proving that when it comes to stock picking, it's a complete gamble.
This is obviously an urban legend but having bought tens of stocks over the years in individual companies from what I thought was research or reacting to the latest news or getting a red-hot tip from a buddy in "the know" has inevitably resulted in either a loss or at best, returns below the market. Not once in my entire investing life have I owned a ten-bagger (A share that grows to ten times it original price e.g. a 1000% gain). I came close in 2020 when it looked like Sasol (JSE:SOL) was going to collapse at the start of the pandemic. I picked up about 100 shares at around R27 per share. I sold them a few months later for around R130 per share banking a 380% return, which I was blown away by. Today it's R170 a share so I would have been sitting on 529% which is pretty close. Unfortunately the original investment was only R2,700 / $175 / £135 so whilst it was a tidy return of over R10,000 / $645 / £500 which I would never complain about, it was hardly going to see me waft into the Lamborghini dealership in Cape Town and ask:
"Is this all you've got my good man, don't you have something a little more expensive? perhaps in lime green?"
And here lies the problem, the investment was a complete gamble, Sasol could have easily suspended trading or gone out of business and I'd have lost everything, that's why I gambled a small amount and why my returns were only enough to buy a cheap kids mountain bike as opposed to my aforementioned gold plated, diamond encrusted Lambo.
This is why I choose broad based, low cost index funds. I can do it with the confidence I can put large amounts of our hard-earned, well, all of our hard-earned cash into them and know that whilst there may be some volatility, it's almost impossible I would lose it all. The current climate is the case in point, we're going through the biggest global pandemic in modern history (accepting the Spanish Flu was much worse....so far), yet my portfolio is beating my performance target for the last 12 months.
The obvious converse of that is that whilst there is little chance of us losing everything in this style of investing, we're definitely getting rich slowly and the chance of a ten-bagger may allude me for the rest of my life.
So then, if we assume only a single stock can give eye watering returns and indexes are the safe and steady hands of the investing world, is it actually possible to use analysis to pick a winning stock or does the urban legend of Joe & the trader remain true today?
Sounds like an experiment in the making to me. Hold my beer and watch this!
I'm going to use the best of 2021 free internet based stock picking technology to see if I can pick a stock that gives an above market return in 2021. To make it even harder on myself, I'm going to limit it to companies who are listed on the Johannesburg Stock Exchange (or else I could just pick Tesla!). Most of my readership is based in South Africa so if anyone wants to play along, or even better play against me with a stock pick of their own, we can make this a little more interesting!
OK, so the rules are simple:
Pick one JSE listed stock to invest in for all of 2021
has to be a company, no cheating by picking the FNB ETN for Tesla!
Use only free, internet based resources and your own common sense to do your stock pick
The stock price to be used is as end of day Friday 22nd January 2021
Performance will be measured in January 2022 and will be the annualised return with dividends reinvested
As simple as that. if you want to play along, you don't really even need to make the investment, just make your stock pick and put it in the comments. with why you chose it (random picks are perfectly acceptable) I'll track everyone's suggestions in a spreadsheet and publish monthly updates. It could be fun.
So, clearly I've already made my pick or that would be the end of this post. Allow me to tell you what it is and how and why I chose it.
Impala Platinum Holdings Limited - JSE:IMP - Also known as: IMPLATS
Share Price (on the day I wrote this): R215.09
Number of Employees: 40,000
Market Cap: R167Bn / $10Bn / £8.3Bn
1 Year Return: 39.12%
Price To Earnings Ratio: 10.4x
So let me start buy repeating myself once more, I have no background in finance, I have no clue how to pick a stock more than anybody else, I don't really understand most of the terminology and I've bought more turkeys than a butcher at Christmas. All I have is an interest in personal finance, I watch the markets generally and I roughly know how to look at the past performance of a company.
So how did I get to selecting Impala Platinum as my big pick for 2021?
Well getting them on my list was pretty easy. I went to Simply Wall Street, which is a website that lets you look at a balanced scorecard for companies, they have a free plan. They cover most markets (including South Africa) and they have a stock screener, which I don't have full access to as that would mean I have to pay for it, but it lets you see the top 26 results in your search, which was useful because I only needed the top 3.
So I did a quick stock screen for the highest scoring company in their opinion on the JSE. Guess who was at number 1 out of the 264 listed companies?
That was easy.
So I was going to use the top 3 and do more research then I noticed that number 2 was also a platinum mine; Royal Bafokeng (Is it wrong that saying that out loud makes me smirk like a naughty child?) and number 3 was PSG. I have a personal issue with PSG. Firstly they're active investment managers which I don't like, secondly I tried to register a stockbroking account with them when I first arrived in SA and I have never had such a terrible experience, they didn't have one bit of helpful automation or online guidance for registering with them, it was like going back to the 80's. They were also super unhelpful so they went on my "Do Not Be A Customer" list, so needless to say, there's no way I'd invest in them.
So then I thought, if the other 2 are both platinum mines, why would you pick anything but the best of the two? Well you wouldn't, would you?
So I decided to start with a list of 1 and do some research on Impala Holdings Limited. After a good bit of searching around on the interweb, I learned the following:
Impala is close to its 52 week high
On average, Impala's earnings have grown at more than 30% per year for the last 5 years
The supposed "Fair Value" of the stock is R272.89
the P/E (The share price divided by the total revenue) is 10.4 but the industry average is 15.6
The share price has been growing at pace over the last 2.5 years
Last year the industry grew at 113% but Impala earnings grew at a massive 987%
Impala has only 11.7% debt and that has reduced over 5 years
Now reading that list, you might be fooled into thinking that I know what I'm talking about But let me break it down what I take from that. A rising share price is good but it's possible I'm buying it expensively. However, the PE is less than the industry which would indicate that the stock is actually underpriced. This is backed up by the fair value being way ahead of the current price. The company has a small amount of debt which means it doesn't need to borrow at a time when borrowing is getting more expensive. If Impala grew at 987% in 2020 and it's still undervalued but has low debt, surely at some point that success has to show in the share price, no?
So in summary, it looks to me like Impala is doing well, has no reason not to keep doing well, it's stock price is already moving but has some unrecognised value that is not built into the share price yet.
What's not to like?
Well not so fast, I've been here before, it all looks good on paper then the next thing you know the backside has fallen out of Platinum or Palladium or Rhodium or any one of the other Ums. Which is why I decided to make it an experiment. I can't see this being a ten bagger, pretty much no chance but the experiment is about can you still pick a winning stock in 2021 and will it outperform the market.
Any good experiment has to have a control group and if I wasn't putting my money into this I would be putting it into an index ETF so we should use one of those to benchmark Impala. And this is where I'm going to make it a bit spicy. I'm going to choose Sygnia's 4th Industrial revolution ETF (SYG4IR) as Impala's competitor.
Because SYG4IR has been good to me for the last year, it's listed on the JSE and is close to its 52 week high the same as Impala. Most importantly it's where I would be putting the money if it wasn't going into Impala. I got a 50% return on SYG4IR last year so this is a big hitter that is not to be trifled with.
And that is the long and short of this experiment. Some time between now and Friday 22nd January I'm going to buy R10,000 / $645 / £500 worth of stock in Impala Holdings Limited (JSE:IMP) and will then track it against both the market and the Sygnia Itrix 4th Industrial Revolution ETF for 12 months.
I'm excited to see what happens.
Once again, if you think you can beat my stock pick or just want to play along by doing a stock pick of your own (even if it's a closed eyed, waggly fingered, average Joe pick), just leave a comment with your pick and what made you pick it and I'll add it to the spreadsheet and publish a league table each month in 2021.
You have until 1st February 2021 to comment if you wish to take part, I'll issue a quick update on that day with the league table of entrants (assuming there is more than just me!).
Who knows, I might even come up with a prize for the winner. I'll buy it out of my profits form Impala!
Until next time, keep living