How I Avoided A 30% Decline in JSE Retail Shares

Update on 29 March 2020

From the initially recommended levels: 

MRP declined by 65% to it's recent low.
MSM declined by 85% to it's recent low.

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If there’s one thing that is a constant in financial markets, is that emotions have and will always be a huge driver of prices. That being said, the patriarch of value investing, Ben Graham, once said, “In the short run the market is a voting machine, but in the long run it is a weighing machine.”

While companies are run by management teams that are highly competent and businesses display quality characteristics, share prices are often bid up to levels that are unsustainable, creating significant downside risk to those who buy at lofty (sometimes very) levels.

One sector of the South African equity market that I have managed to avoid and most importantly protect capital has been the JSE retail sector.

During March 2018, at the peak of SA’s ‘Ramaphoria’ moment, I took the view that the South African Rand may have reached it’s short to medium term peak and that selected JSE shares could come under pressure should we see the commencement and acceleration of a weaker local currency. Against the backdrop of rising unemployment, potential interest rate increases, rising inflation as well as a weaker global economy, a relatively expensive i.e. highly valued retail sector seemed poised for substantial downside.

On Friday 9 March, readers of my research would have seen the note titled: “Will The Rand Reverse Retail?”. In it I recommended a short/sell on two shares: Massmart at R173 and Mr Price at R286 - multi-month peaks for both of these shares. In another note in February 2018 I also recommended a short/sell on Shoprite at around the R255 level.

This past week (ending Friday 18 January 2019) the ‘chickens came home to roost’ as retailers delivered their trading updates for the quarter and nine-month period ending 29 December 2018. Without going into detail, I would just say that the results did not match the expectations. In other words, the high valuations (Price/Earnings Ratios in the mid-to-high teens did were matched by poor results). On the back of that we saw shares such as Mr Price, Woolworths and Truworths decline substantially. Mr Price, which released results on Thursday, saw it’s biggest 1-day decline in many years, shedding 16% on the day, while losing a further 3% on Friday (18/01/2019). Massmart, which is yet to report results, is lower by 35% since my March 2018 warning, while Shoprite last closed at R190, a 24% decline from February.

Along with adopting a fundamental outlook and assessment, the use of technical analysis (chart analysis) was an essential tool in avoiding significant losses and could be seen a ‘risk management tool’ as opposed to one that is often associated with ‘price prediction’.

At current levels, the JSE retail sector remains relatively expensive thus we could continue to experience share price pressures over the short and medium term.

Update: Today (22/01), Massmart provided a sales update for the 52 weeks ended 30 December 2018. The shares closed lower by 20%.   

Charts at time of idea:

MSM

MRP: 

Until next time, all the best.

Lester