Financial markets all over the world have been battered by the economic fallout of the coronavirus with double digit falls recorded on a daily basis. When stocks fell lower and lower; there were a few bulls ready to pick over the bones of depleted stocks, but it was only for the very bold. For those with cash; this could be an opportunity especially as some stocks appear to have reached a turning point. Sam Houlie, the Chief Investment Officer at newly merged RECM Counterpoint told Biznews founder Alec Hogg that equities have never been as attractive. Houlie also reveals some of the companies that he favours and has an interesting perspective on Sasol. – Linda van Tilburg
Sam Houlie is the Chief Investment Officer now of RECM Counterpoint. Sam, you and Piet Viljoen got together a few months ago. I remember I spoke to Piet at the time. How’s it working out so far?
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Hi Alec, and yes, it’s worked out very well. Piet and I have known each for a very long time, over many years. We finally managed to end up working together and it’s been amazing. Really, you have to just step back and think about why we didn’t do it sooner. The teams have come together and the insights have been great and of course, we’re philosophically aligned. At the same time, what we’ve been able to do for clients in terms of our portfolios over this very, very difficult period has been very encouraging. We’ve managed to hold up really well. We are down. Most portfolios are down but at the same time, we found a way to preserve capital a lot better than the indices or the broader averages, which really means that we’re well-positioned once we get to a bottom and in the recovery.
Yes, and you’re philosophically aligned. You’re both Warren Buffett followers. I mean, we’ve been at the Berkshire Hathaway AGM together a few times and you both had quite high amounts of cash in your portfolios going up to this crash. Well, it’s always nice when one looks back and you were right. But what made you nervous?
There are a variety of factors. Firstly, I would say that it always looks great in hindsight holding cash once the market declines and falls, especially when you’ve had a precipitous fall as we’ve just had. But to be quite honest, you know, you have to go back eight or nine months. It wasn’t very easy to hold cash during the time the market was going up and it was difficult. Temperamentally, it was a very difficult thing, so you know, all of these things always look good and easy in hindsight, but they’re not. But what are the factors? Your question was, what are the factors that we look at, there are a whole lot of different factors. The first thing is the nature of market action. We have had a very bifurcated market where the leadership in the markets has been very narrow in a small group of stocks, both locally and even globally. Whenever you have a market of that nature, you know, you effectively have a very weak sponsorship underlying, which really means that it’s a weak market there. One of the other factors is that we have a global portfolio fold with stocks run by what we call owner managers, businesses run by people who have a huge stake in their businesses. And they’re really looking to invest and allocate capital for the long term – Warren Buffet being one of them. Now, if you look at Berkshire Hathaway, Warren himself has kept a high element of cash. In fact, he has his highest allocation to cash on his balance sheet. So that would be another indication. And then just, you know, the valuations of some of the leading stocks, those are just some of the ones, the reasons that come to mind right now. But it’s a multi-factor approach and there are a lot of things that went into that decision.
It’s lovely to have cash in this kind of a market. When you look at the opportunities available, are you starting to buy yet or what is going to spike? If not, what’s going to spark you into making the acquisitions?
Yes, we have started buying already. I think that really you… It’s impossible to time the market holding cash. As the markets close to the Top End being early on, that is a sign that we don’t really think that timing the market is something we can do. But now we’re not trying to do it this time around either. What we’re trying to do is just slowly move into ideas that meet our criteria, that fit with our philosophy. And so, we’ve already started. We’ve been buying. We continue to buy equities. We haven’t used up all of our cash. We have a lot of it, you know, across a variety of portfolios, so there’s still a long way to go. But we’ve already started and we’re very excited by the stocks we own and very excited by the opportunities we see.
Presumably these stocks nowadays are yielding more dividends if they manage to keep their profits going than you would get from a bank deposit.
Yes, exactly. It’s a very unique situation, so if you step back, what we’ve seen is this very precipitous fall in a very short space of time. And it’s really taken a lot of these stocks to dividend yields that are significantly higher than what you can get in the bank, as you say. The question, of course, is can these businesses survive? Can these bonds continue to generate cash flow? And this virus has really placed economies under strain and business under strain. And what you really need is an incredibly strong balance sheet and a very resilient business, a business that in terms of operating leverage, can survive. The good news is we can find businesses where we feel that they could easily continue paying those dividends and have enough cash to sustain them through those very difficult 12 to 18 months, which is uncertain, and come out at the end with the ability to continue increasing their dividends. So, you know, we probably put together a short list of stocks of between 20 and 30 stocks in our local market that meet our criteria. And similarly, on a global basis. So, you know, we are spoilt for choice. Alec, you know, in terms of my history of investing in equities globally and locally, it’s been rare for me to find so many great opportunities with strong balance sheets and the ability to survive a very uncertain period that we are facing.
How long are you seeing this period lasting for?
We honestly have no idea. I think the uncertainties are way too high and we’re not really trying to predict it. I think that if you look at where we are in South Africa, let’s look at the local economy. I mean, we are on the verge of it. Of the 21-day lockdown in our country, there’s a lot of uncertainty. We think smaller businesses will struggle. We think many businesses will struggle. There’s a lot of support in place. But it’s hard for you to judge not only how long this will last. What the impact will be on the revenue line and ultimately on the cost-line. So, I would say that 12 to 18 months is a conservative estimate of what it takes just to come through. On the other side, and that’s what we’re looking at. So, if you reverse engineer 18 months, what you really want to know is, is the balance sheet strong for equities? Is cash flow sufficient to survive? And will this business be around and with the ability to thrive and effectively mop up a lot of the demand that will be that that will surge at that point in 18 months’ time?
How bullish are you relative to other times given you’ve been in the market for a few decades?Â
I would say I am. I’m as bullish as I’ve ever been on equities. Based on the opportunities and the quality of the opportunities that I see today, the one difference between now and the previous occasions when I have been as bullish. It is really that the environment globally is an environment where you have very low interest rates close to zero or even negative yielding rates. And on a relative basis, equities have never, ever been as attractive. And remember, equities are really a share of a business. People forget that. They think it’s a price that moves up and down on a screen on any given day. It’s really an underlying business run by a management team that you have to like, you have to trust and you have to admire them in the way they allocate capital. So, I haven’t ever been as bullish on equities relative to other asset classes as long as I can remember. So that makes us unique. But we are in a unique situation. You know, after 10 years of extraordinary policymaker intervention and monetary intervention and the announcement that the president recently made.
Do you think that’s going to bring the end date closer? In other words, the end of this crisis, this war that some people talk about?
Yes, I think it was the right decision. I think it was a courageous decision. It was steeped in wisdom. I support it fully. I know it will be hard. I think that in the long run, economies can only survive if people are healthy, able to contribute. And I certainly think that from the point of view of South Africa it is phenomenal. You know, we are often seen as a third world economy. But this is a first world response. And in some ways better than some of the other leading countries in the world in terms of the way they’ve responded. So as a South African, I’m very proud. I feel that we’ve done the right thing. And then let’s see where we are. Post the lockdown in 21 days and then reassess from there.
All right. For those who like you have got cash ready and itching to invest in the market. Have you got any particular stocks they should be doing their homework on?
Well, you know, this is always the difficult part. I mean, I can tell you what we have in our portfolio and the ideas that we find attractive. And in that sense, effectively, we are invested in our own funds. So, these are the ideas that we support. I think if you look across the South African marketplace, you know, you have many stocks with great balance sheets that have been absolutely decimated. You know, stocks like RECM grow it really over time. Rainbow hasn’t really shot the lights out for the last while, but it has an incredibly strong balance sheet and will definitely survive over the next 12-18 months. And we have a list of stocks that we can think of. You know, stocks like Netcare, the banks, the South African banks, the big four banks have had a torrid time in terms of their share prices, but they continue to act as well as they can in a very tough environment. We can find some quality listed property stocks and then tobacco stocks, while we don’t have as high a weighting in tobacco as we’ve had in the past. The cash flow generation continues to be strong enough to enable them to survive. So, in the South African play marketplace, you know, we find those ideas and then we’re looking at retailers. You know, retailers will be hit very hard. We don’t know how big the impact will be but you have some retailers with net cash on their balance sheets. You know, we think of retailers like Truworths where they’ve had a difficult period, but they have a very strong balance sheet. So can we look at that and we were very excited by what we find and what we can see. And that’s just some of the ideas that we have.
You didn’t mention Sasol?Â
No, I didn’t. And Sasol is not in our portfolios. We do not own it. I think if you step back, Alec, you know, over the last three years, I’ve been relatively quiet. In fact, I can recall the last time I was on a radio program for reform five years ago. And in the last three years at Counterpoint, we have consciously avoided stocks with weak balance sheets, stocks with very difficult outlooks where we felt that management was misallocating capital. Sasol is the one that we could have lost a lot of money. We were tempted and we looked at it. But in the early part of this year, you know, we just felt that the balance sheet was so weak that we would not be willing to allocate client capital to that stock. And even today, after it’s fallen, Sasol has fallen over 90 percent year to date, which is an astonishing fall for a stock that is so widely owned, a stock that is big in the index. And we’ve effectively avoided it for most of that fall and we’re not interested today, at all.
