Paul Theron reveals hot stocks amid South African government shifts

In an engaging discussion, Bronwyn Nielsen and Paul Theron, CEO of Vestact, explore the latest trends in government policies and their impact on hot stocks. Theron provides keen insights into how regulatory changes and economic strategies are influencing market dynamics, highlighting key sectors poised for growth. With a focus on navigating the complexities of investing amidst shifting government landscapes, Theron shares expert advice on selecting stocks with the highest potential for short-term gains. This conversation offers a captivating blend of financial expertise and strategic foresight, making it a must-watch for investors keen on staying ahead in a rapidly evolving market.

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Highlight from the interview

In a recent interview with Bronwyn Nielsen, Paul Theron, CEO of Vestact, delves into the intricate relationship between government policies and hot stock picks. The discussion kicks off with Theron addressing the excitement around a sector potentially entering a phase of hostile buyouts, though he believes it’s more about family investment vehicles accumulating stakes in businesses they favour. Theron emphasizes the unique shareholding structure of Richemont, which maintains Rupert family control, and speculates on succession plans involving Johann Rupert’s children.

Theron shares insights on L’Oreal, noting its strong performance but pointing out the challenges posed by high dividend withholding taxes in France. Despite these challenges, L’Oreal remains a valuable holding for many clients. He advises a diversified approach to investing in luxury consumer goods, suggesting stakes in companies ranging from Nike to Richemont to navigate market fluctuations.

Highlighting emerging opportunities, Theron mentions Amgen’s promising oral weight-loss drug in phase three testing, which could revolutionize the market dominated by injection-based treatments. He also reaffirms confidence in established tech giants like Nvidia. The interview wraps up with Theron reflecting on the ease of modern digital platforms for conducting such insightful conversations, contrasting it with the old days of studio visits.

Edited transcript of the interview ___STEADY_PAYWALL___

00:00:11:13 – 00:00:31:23

Bronwyn Nielsen: Paul Theron, it’s been an age, and I’m looking forward to updates from your side. Specifically in terms of the markets. Very interesting elements afoot as we await the Cabinet’s decision in South Africa. Give us a sense of where you are at in the markets right now, sir.

00:00:32:01 – 00:00:55:19

Paul Theron: Yeah, Bronwyn, it has been ages since we did that TV show together. But, you know, we used to focus a lot on JSE equities, but our investment business here at Vestact just shifted almost entirely to US stocks. So we’re still entirely Jo’burg based, but our clients are mostly invested in global markets. You know, it’s been extremely tough for locally listed shares to thrive.

00:00:55:19 – 00:01:18:14

Paul Theron: So I guess the real question is how’s it going to look if we do get a government of national unity and some credible pro-business politicians installed in key economic ministries because that could usher in a new era. I mean, let’s be optimistic. We could see a bit of a value rerating of some of the core South African equities.

00:01:18:14 – 00:01:19:13

Paul Theron: That would be great.

00:01:19:15 – 00:01:31:00

Bronwyn Nielsen: Have you positioned yourself for as such? I mean, you say largely Vestact’s portfolios are offshore, but is there a bit to be had on the South African market in your opinion?

00:01:31:02 – 00:02:02:10

Paul Theron: Well, we have not. You know, we’ve got about 12 billion rand under management, of which about 8 billion is direct US equities like Apple and Visa. Our South African asset management business usually positions in stocks like Richemont, Naspers. I mean, we do have small holdings in stocks like Discovery, Aspen, and the like that you’ll remember the names I was always harping on about.

00:02:02:12 – 00:02:20:22

Paul Theron: We also have quite a lot of South African investors whose trusts and such are invested in S&P 500 and JSE trackers. So that’s a bit defeated. But I would say, you know, a stock like Discovery is interesting. You know I’ve got a personal stake in Discovery. My daughter works at a group in London.

00:02:21:01 – 00:02:41:09

Paul Theron: And I kind of think, yeah, I mean, for me, it’s interesting as to whether or not there may not be a rerating because who knows, maybe the pipe dream and the railroaded through in the last two days, this or the election. You know, Warren ran, properly off the road, and it ought to be.

00:02:41:10 – 00:02:48:09

Paul Theron: So if that were the case, you know, Discovery’s medical aid business might be viewed in a different way by the investment markets. So let’s see.

00:02:48:10 – 00:03:09:11

Bronwyn Nielsen: Well, you’ve never been one to shy away from the growth story. Let’s talk about some of those stocks you mentioned Apple and Nvidia from an offshore perspective. Obviously, this goes back to what 5 or 6 years ago they were in your portfolio. You were not holding back. Are you still advocating in favor of accumulating at current levels?

00:03:09:13 – 00:03:31:12

Paul Theron: Yeah, absolutely. You know, the big picture global outlook is so, you know, progress across the board. We had a very difficult start to the decade, what with Covid and that sort of stuff, followed by a shocking 2022 where inflation appeared to be flying to unheard-of levels. But I think we are now back where we need to be.

00:03:31:12 – 00:03:56:15

Paul Theron: Sure, there are some regional conflicts, most notably the one in Ukraine and the one in Gaza. Yeah, potential issues and flashpoints in Southeast Asian environments. But broadly speaking, companies are doing well. Consumers are consuming. People are travelling. Tech companies are doing well because people value those services. People selling stuff want to advertise on those social media platforms.

00:03:56:17 – 00:04:19:08

Paul Theron: I think that’s where you’ve got to beat the AI stuff that’s coming down the pike. I mean, that’s been a pleasant surprise. Who knows? I mean, some people say AI is just fancy autocorrect. Others have pointed to real value that it can deliver in industries where the function of the work is to deliver words. You know, it can be really powerful.

00:04:19:14 – 00:04:34:22

Paul Theron: And Nvidia, of course. So there are many industries for which this is well positioned. You know, you remember five years ago I was going crazy because our holding in Tesla was doing so well. Now we still own that one, but it has not done so well lately.

00:04:35:00 – 00:04:47:18

Bronwyn Nielsen: Not done so well. Can I remind you that we’re taking significant pain on Tesla so reverse your decision on that? Are we holding it for the longer term? You still believe in Elon Musk?

00:04:47:20 – 00:05:17:00

Paul Theron: Yeah. So in other words, that one rallied, if I recall rightly, if you look at the five-year chart, one could consider this. But I think it hit all-time highs somewhere around 2021. And the whole market’s post-Covid rally or any tech-type stuff. So, it has really struggled since then, I think mostly because there’s a sense in the developed world that people are not falling headlong into trade agreement economic policies across the board.

Read more: Cyril expands SA Cabinet, adds 16 new members, drops 14

00:05:17:01 – 00:05:41:05

Paul Theron: You know, there was a time when people were saying, you know, we’ve got to shut down these coal-fired power stations like yesterday, and you’ve seen a pushback from that. So the electric vehicle market is not nearly as receptive as it was before. Governments are not giving such big subsidies. But there really isn’t anything else if you want to invest in renewables and green technologies and batteries and driverless vehicles and so on.

00:05:41:07 – 00:05:49:23 Paul Theron: Other than Tesla, everything else is vastly less attractive. So I think if you want to be in that space.

00:05:50:00 – 00:05:55:07 Bronwyn Nielsen: If I’m hearing you loud and clear, you’re saying get into Tesla. Now, this is a buying opportunity call.

00:05:55:09 – 00:06:14:22 Paul Theron: I would say so. I mean, if you don’t own anything that has comparable industry focus, then I would say that’s fine. Most of our Tesla customers are hanging on to the stocks. They’ve got. A couple of them are still leading, you know, significant profit because they bought them back in 2015, 2016, 2017.

00:06:15:00 – 00:06:34:23 Paul Theron: and thereafter, those that bought them at the highs are feeling a little grim. But we’re telling them to just sit on their hands and, sure, you know, if we’ve got significant decline rivals, yeah, we’d be buying them back as well, but we’d also equally be buying Nvidia.

00:06:35:01 – 00:06:38:20 Paul Theron: You know, even after this stellar run that it’s had.

00:06:38:22 – 00:06:45:06 Bronwyn Nielsen: I’m not surprised. As I said before, you’re not afraid of buying in at all-time highs.

00:06:45:08 – 00:07:15:11 Paul Theron: No, that’s a good thing. If the stock’s at an all-time high, it’s a strong buy signal. I mean, it might sound a little absurd, but stocks making all-time highs tend to make new ones. Sure, there’s every now and then something that kind of gets a little bent out of shape. But with large-cap stocks making new highs, in my opinion, that’s generally a buy signal because big companies that dominate their industries with tremendous margins and growing sales tend to go from strength to strength.

00:07:15:13 – 00:07:31:18 Bronwyn Nielsen: You mentioned 15 stocks. Give me a little more clarity, if it’s not proprietary information, on where we can look into those 15 stocks to get further clarity on your perspective, other than the top-performing growth stocks?

00:07:31:19 – 00:07:52:12 Paul Theron: Well, I mean, we’ve developed a strategy, as you may recall, to be quite focused on technology and healthcare. So if you go to a website that displays all of the S&P 500 constituents and ranks them by their market value, you’ll see that tech is a big, big part of the market these days.

00:07:52:12 – 00:08:19:11 Paul Theron: But there are also sectors like consumer and financial services, basic materials, real estate, and all sorts of stuff. We tend to avoid those and focus on technology and healthcare. So healthcare, you know, includes companies like Eli Lilly with weight loss drugs and others which are doing spectacularly well, and we think they’ve got a lot of potential.

00:08:19:13 – 00:08:50:22 Paul Theron: But it also has companies that make medical devices like Stryker and Johnson & Johnson. So we like those stocks. And then we do have some residual consumer exposure, but I must confess that’s been tough because the problem with consumer stocks is that, you know, if you’re in retail, that ranges from specialist high-margin retail like luxury goods all the way through to big-cap supermarkets like Walmart and Target.

00:08:51:00 – 00:09:11:21 Paul Theron: And the problem with that spectrum of stocks is that there’s always somebody who seems to be doing well and capturing market and won’t be screwing up and losing it. So it’s very difficult to have a very long-term lease with regards to those. We also typically invest in Nike, for example, as luxury is something we’d be quite keen on.

00:09:11:21 – 00:09:32:21 Paul Theron: So one of our current holdings, which we’ve held for a while, you’ll remember, is Nike, but also it’s down 15% this year. That’s rambling about inventory overrides all that kind of stuff. So broadly, we’d like them to wake up. They’ve actually got results out tonight. Let’s see how they’re doing. And they’ve got the Olympics coming up in Paris where they’re going to launch a lot of exciting new stuff.

00:09:33:15 – 00:09:39:04 Bronwyn Nielsen: Are you anticipating a good set of results and maybe a rally in the share price?

00:09:39:06 – 00:10:03:04 Paul Theron: Yeah, maybe because a lot of the problems they’ve had came from inventory management. So what happens with a company like that is, you know, they decide on, say, fly shoes or Zoom Flys or whatever you like to run in, and then they produce a set number of those, you know, maybe various colorways. And then if they don’t sell well, they have to discount them and delay new models.

00:10:03:06 – 00:10:32:01 Paul Theron: And so those have gone, and I think they’ve largely addressed that. So what happens with their results is sometimes you’ll see, oh, big news, you know, inventory drawdowns. But this should get better. They’ve been in a bit of a doom cycle with them. But, you know, another thing to remember is that I’m not a big seller. My general view is if you own something with a quality balance sheet, quality management team, quality brands, you should hold onto it.

00:10:32:03 – 00:10:36:22
Paul Theron:
But having said that, you know, sometimes these companies can test you for too long.

00:10:37:00 – 00:10:50:10
Bronwyn Nielsen:
Let’s go back to the healthcare theme, because we haven’t chatted since COVID, and you must have seen incredible returns with your healthcare play during the COVID climate.

00:10:50:12 – 00:11:16:09
Paul Theron:
Well, that is interesting. Not universally so. Certain parts of healthcare did badly during that time because there were fewer hospitalizations. So the medical device makers, you know, the hip and knee replacement people actually did poorly. Then, companies that were in vaccine development went to the moon. I mean, Moderna was up like a rocket ship at some point.

00:11:16:09 – 00:11:37:20
Paul Theron:
It was the largest and most valuable healthcare company of them all. Pfizer did well. BioNTech, the company that worked with Pfizer, a German-based developer of the vaccines, did well. But the minute they stopped selling those things, as people didn’t want to get injected anymore, they fell hard. So Moderna is now way below where it was at its heights.

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00:11:37:22 – 00:11:40:02
Paul Theron:
The tricky thing, remember.

00:11:40:04 – 00:11:53:13
Bronwyn Nielsen:
As you said, you hold through cycles. So Moderna, I take it you’ve held through that up and down, and you’ll expect a rerating because you believe fundamentally in the stock going forward.

00:11:53:15 – 00:12:15:07
Paul Theron:
No, in fact, we didn’t ever buy Moderna for clients. You know, we kind of looked at it. We had a few clients who nibbled, but we didn’t ever make a widespread recommendation. We owned Johnson & Johnson, which, you remember, did have a, do you know, virus vaccine, which proved afterwards to be, you know, not particularly effective.

00:12:15:10 – 00:12:37:18
Paul Theron:
So that kind of caused a bit of a rush up and a rush down. But the other point I wanted to make is that if you’re a tech company like Microsoft, right, and you invent new AI tools to sell your office suite, you can carry on doing that every year and making more and more money from premium users.

00:12:37:20 – 00:13:04:02
Paul Theron:
In the healthcare game, you get a 20-year patent protection, and then everybody else can come after you with generics. There are some provisos to that. Sometimes what these companies do is they make slightly better versions of the drugs, which they combine with other ingredients. Then you end up with an extension. But in general, healthcare is a less attractive business than technology.

00:13:04:04 – 00:13:12:04
Paul Theron:
However, we think these weight loss drugs are the business. I’m not sure if you follow that sector, but I think that’s where you have to go big.

00:13:12:06 – 00:13:33:11
Bronwyn Nielsen:
I have followed, and I was chatting to David Shapiro last week about the weight loss drugs specifically. And Jarrod, which Aspen has access to through the Eli Lilly partnership. You mentioned Aspen as a player in our discussion. Talk to me a bit about Aspen and the future as you see it.

00:13:33:12 – 00:14:02:12
Paul Theron:
Well, again, that’s a stock for South African-based investors for 15 years. It’s had its ups and downs. You know, I love Stephen Saad, but, you know, the mission that he embarked on, which was to globalize the firm, didn’t really work all that well. There were some successes. And ironically, when I was wandering around Munich last week, the gay pride event was on, and the medical tent at that event was sponsored by Aspen.

00:14:02:14 – 00:14:36:13
Paul Theron:
So they must have a Germany-based division, which, you know, in the consumer environment. You’re right, they do have the right to produce Jarrod and Zep for Eli Lilly. And I think that’ll probably be a good, positive relationship for them. But you remember those things are largely deals where the margins are quite low for the manufacturing relationship. The intellectual property and the product development margins will continue to be received by the multinational.

00:14:36:15 – 00:14:58:18
Paul Theron:
So I just think that the weight loss drugs are a big shift for humanity because, you know, for 99.9% of our evolution as a species, there was food scarcity. So we evolved to be hungry more than we need to be. And now that we live in an environment where there’s fantastically tasty food everywhere, it’s a serious problem.

00:14:58:18 – 00:15:22:09
Paul Theron:
So we all need help in turning off our urges, and these drugs have fabulous effects in that department without any seemingly worrisome side effects. And as you know, the drugs were used for diabetic treatment for decades already. So that’s why we know that they’re safe. So I honestly think it’s going to be a big seller. And for medical aids, it’s a no-brainer.

00:15:22:10 – 00:15:44:03
Paul Theron:
They haven’t embraced the concept yet, but they’ve got to pay for these drugs because then, you know, premium payers will last much longer, and the economics will be much better. And all of the terrible things that happen to people because they’re heavy will happen less. So I’m a big supporter of this, although, I mean, obviously, I’m a biased shareholder, so I do tend to go on a bit.

00:15:44:07 – 00:16:11:19

Bronwyn Nielsen: Now, Eli Lilly is your international player. Are you still in Johnson & Johnson? And perhaps also just touching on the wearables, you spoke about Stryker. You mentioned predictive wearable devices that can monitor your heart and cholesterol. Is that what you’re talking about when you refer to the future of health tech?

00:16:11:21 – 00:16:35:10

Paul Theron: That is indeed another subset of the medical devices and medical technology field. There’s a crossover to Apple because, remember, Apple is probably our most widely held stock. It is not our most valuable stock anymore because it got overtaken by Nvidia doing so well. But the vast majority of our clients hold Apple. Apple, as you know, had an interesting foray into the wearables arena. They obviously have their Apple Watches. However, they are not as advanced as some people might have thought. The fancy, expensive Apple Ultras do some of that, but the ordinary Apple Watch, as far as I know, doesn’t have a device for glucose or sugar level monitoring yet. So, there are some issues there, but I think just generally, it’s one of the things that takes us further.

00:16:35:11 – 00:17:04:18

Paul Theron: I was just thinking about this while reading a story today about Google and their driverless car service, Waymo, which will be launching in San Francisco. People who are as old as I am grew up not entirely trusting computers and definitely didn’t trust an internet connection. You would generally expect that the service was offline. It didn’t worry you if you didn’t get an immediate response from a computer because you assumed it would eventually work. So, to go from there to a world in which we live now, where people trust data that’s collected by your cell phone or retrieved as you’re connected, to the point where people are prepared to get into a vehicle driven autonomously is a huge shift. I can tell you anyone over 60 is not going to trust that car and won’t get into a driverless cab on the streets of Johannesburg, but anyone under 30 probably does.

00:18:12:01 – 00:18:44:06

Bronwyn Nielsen: And of course, a youthful population globally is what we are working towards when it comes to those things, particularly in Africa. Paul, I want to go back to Richemont because as long as I’ve known you, it’s been that luxury goods play. We’ve had so many conversations about the robust consumer at that high end and how they are not impacted by economic cycles. Are you still accumulating Richemont?

00:18:44:08 – 00:19:15:19

Paul Theron: You know, the luxury goods industry is fascinating because South African investors typically approach it through Richemont simply because of its South African origin, and it’s available to invest in on the JSE. There’s a broad spread out there. LVMH, in some ways, is a much broader and more reliable way to invest in the sector because they’ve got a diverse mix. The handbag business is incredible. They have jewelry, they have booze. They’ve got a big mix, so that as one part may be doing well, the other might be doing less well. Richemont, obviously, is high in jewelry and wristwatches. Now, I don’t know how you feel about wristwatches. Personally, I’m not a mechanical wristwatch wearer.

00:19:15:21 – 00:20:00:01

Paul Theron: I only use an Apple Watch when I run. I don’t use it apart from that because if I want to know the time, I look at my cellphone, which is never far away. So, if I were an international investor, I’m not sure I would buy Richemont with all the other options available. Hermes is an amazing company with amazing products and is incredibly well-run. That’s another option. But if you’re in South Africa and have limited options, you can do a lot worse than Richemont. As a global business, it does well in Asia, Europe, and the United States. They are run conservatively and tick all the right boxes. So yes, I’m definitely still a Richemont supporter. I think you might have noticed there’s a story doing the rounds about the LVMH’s possible interest in Richemont again.

00:20:34:17 – 00:20:36:13

Bronwyn Nielsen: How do you think that’s going to pan out?

00:20:36:15 – 00:20:58:15

Paul Theron: Well, I don’t know. My colleague Brad Khumalo is getting very excited. He likes the sector and he thinks it’s the beginning of, yeah, like, a hostile buyout, but I don’t think so. As far as I can tell, it was more that the family has an investment vehicle and they sometimes accumulate stakes in other businesses just because they like them.

00:20:58:17 – 00:21:20:21

Paul Theron: Because the shareholding structure of Richemont, as you know, gives the Rupert family continued control through different classes of voting shares. And as far as I know, Johann Rupert wants his children to succeed him in running the business. His son is already on the board, so I don’t know. I don’t speak to him, so I don’t know what he really wants.

00:21:20:21 – 00:21:29:09

Paul Theron: He could get a load of LVMH shares and then just carry on playing golf the rest of his life. His children could sit on the board of LVMH. I don’t know, maybe. Who knows?

00:21:29:11 – 00:21:53:21

Bronwyn Nielsen: I’m sure you might actually solicit that call from him. What do you see? He’s going to give you an update on his succession plans. L’Oreal is something that I have to talk to you about because, again, as long as we’ve had these discussions on the markets, the lipstick indicator, L’Oreal beauty products. It’s been your plan. And you’ve got the fantastic story about the fund.

00:21:53:23 – 00:22:02:19

Bronwyn Nielsen: Update me on L’Oreal. And, I am great. This is still something that features strongly in your portfolios.

00:22:02:21 – 00:22:21:21

Paul Theron: Yeah. You’ve got a good memory. L’Oreal, you’re right, is a stock we’ve owned and supplied for quite a while, although we actually stopped buying it. I’m sorry to have to report. So we have about 60 clients who still own it, and about 3 or 4 billion dollars’ worth of the stock. You know, studio setup in New York.

00:22:21:23 – 00:22:48:08

Paul Theron: But we stopped buying it for a couple of reasons. Firstly, because it’s French, and secondly, because it has an extremely high dividend withholding tax rate. But those two, of course, are linked. So European companies tend to trade in their primary markets, in the case of L’Oreal, in Paris. And then they trade on a secondary basis as American depositary receipts priced in dollars in the US.

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00:22:48:10 – 00:23:17:06

Paul Theron: And when you get a dividend from them, instead of having to cough up 13%, which is the default in the US, you have to cough up 35% to the French government. There are also some marketable securities taxes which you have to pay when you buy them, but it remains a very, very good company with great upside. I guess what you could take away from this is that there are lots of choices, and it’s the question of, you know, where you want to position yourself.

00:23:17:08 – 00:23:42:21

Paul Theron: On balance, I would say if you really like the sector and you think that the luxury end of the consumer goods industry is where you want to be, you probably would do well to buy three or four or five different stakes, you know, from something which is pretty mass-oriented, like Nike, all the way through to something like a Richemont at the top end, because they will definitely have their moments.

00:23:42:22 – 00:24:07:09

Paul Theron: There will be times when they do well, and times when they lose their creative director. They have a bit of a down year, and you have to hang on because, you know, trying to chop and change and buy and sell and, you know, react to the markets, by which I mean the consumer market as well as the share market, can be very tough, and you tend to get the timing wrong.

00:24:07:11 – 00:24:39:09

Bronwyn Nielsen: So, Paul, my last question, often people come up to me and go, “How is Paul Theron, and what is he doing?” etc. It’s a hangover from hot stocks engagements for many, many years. So of course, I have to say to you, the hottest stock that you want to put to us today of the numerous shares that you’ve spoken to, and it’s great getting to understand and drill down into your international portfolio, understanding your local portfolio again.

00:24:39:11 – 00:24:42:21

Bronwyn Nielsen: But Paul Theron, the hottest stock?

00:24:42:23 – 00:25:17:13

Paul Theron: That’s interesting because of course, sometimes people are buying or investing in the markets for, you know, longevity rather than for short-term returns. You know, I suppose, you’re talking about the stock that has the greatest upside for sort of short-term growth as a potential reaction, for example, to quarterly earnings that might be coming because, you know, I can’t say something like Microsoft because, you know, hell, everybody owns that.

00:25:17:15 – 00:25:21:10

Bronwyn Nielsen: Dig harder than Microsoft.

00:25:21:12 – 00:25:52:10

Paul Theron: Yeah. You know, what I’m going to say is I’m going to dig into share portfolios for another stock, which we haven’t mentioned, which happens to be in the healthcare sector. That’s Anjan. So the market is interesting because it’s a diversified healthcare company with a whole bunch of biotech products, but they have a weight loss drug, which is in phase three testing, which actually is a one-segment product and is also oral.

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