There is nothing like bad news...
On 8 August 2019 Health Minister Dr Zweli Mkhize presented the NHI Bill to parliament.
This was part of the South African government's plan to push forward with the national health insurance scheme (NHI).
Under the NHI, all citizens will be insured by the state and private health companies will be side-lined.
If such a thing is implemented...
Private health companies will have their earnings significantly reduced as the state would take their clients over.
So how did the market respond?
Investors responded by dumping shares in listed health companies.
The below movements in share prices (using closing prices) were observed for health companies dealing in health from the 8th to the 20th of August.
To name a few:
Discovery (R115,47 to R100,1)= -13.3%
Mediclinic (R58,43 to R56,23)= -3.7%
Aspen (84,53 to R65,0)= -23.1%
Netcare (R16,60 to R15,10)= -9%
Adcock Ingram (R59,00 to R56,00)= -5%
J540 -Health care index (3655.92 to 3284.81)= -10.1%
Meet Mr Market
Mr Market is an esoteric term in investing circles used to represent market participants that base their investing decisions on sentiment.
By sentiment we mean the prediction of a company’s future prospects based on current events.
Share prices are ruled by the laws of demand and supply from economics.
The law of supply states that, for a certain good/service:
when demand is greater than supply, the price rises, ceteris paribus.
Similarly, when supply is greater than demand, prices fall, ceteris paribus.
At any time, there is only a limited number of a company’s shares available for purchase.
The amount of people willing to buy those shares can drastically change based on the current sentiment on the company.
The pessimist…
Nobody likes bad news
When profits fall, does not meet analyst forecasts, laws change that can impact negatively on a company…
Mr Market usually gets very pessimistic and sells shares.
When the number of sellers exceeds buyers,
This leads to an oversupply of the share, and prices will fall (assuming all remain constant).
Phumelela Gaming and Leisure Limited (JSE-PHM) operates horse racing and sports betting, owns Betting World and 50% of Supabets.
Gambling is a heavily regulated industry.
On 28 March 2019, the Gauteng MEC for Economic Development, Environment, Agriculture and Rural Development published amendments to the Gauteng Gambling Regulations.
The amendments will result in Phumelela no longer receiving a share of the betting taxes collected on horse racing.
Prior to the amendment...
Phumelela would collect 6% of a punters' winnings on bets on horseracing in the form of a betting tax.
This tax is paid over to the Gauteng Gambling who in turn were obliged to pay half of this tax to Phumelela.
The amount received by Phumelela was approximately R75m per year.
The company's profit for the financial year ended 31 July 2018 was R151 million (2017: 143 million).
The loss of R75 million is clearly significant to the company’s fortunes.
So how did shareholders respond?
From March 28 to 30 September 2019, the share price fell from R9.94 to R2.50.
The optimist…
Good news gives health to the bones
When Companies have increasing profits, are beating analysts forecasts, introduce innovative new product lines…
Mr Market usually gets optimistic about that company’s future and buys shares.
When the number of buyers exceeds sellers,
This leads to an undersupply and price will increase (assuming all remain constant).
Leading up to the 2010 FIFA world cup, local JSE listed construction companies (Aveng, Murray and Robers and WBHO among others) were awarded contracts to build stadiums, upgrade transport and other infrastructure.
Along with the increased business and earnings, these companies shares soared in marked value.
Somehow people forgot that you can’t build stadiums every year.
The world cup came and went,
Spain won.
After the contracts had dried up,
Earnings declined,
And pessimism crept in again.
How Mr Market’s thinks.
The stock market is about popularity of a particular company's share(s) in the short term and not quality.
Mr Market bases His investing decisions and that current events:
favorable or unfavorable to the company will persist going forward.
This will in turn decide whether he wants to hold a share or not.
This ultimately can in the short term create significant differences between the intrinsic value and market value of a company.
Over-Optimism can suddenly result in a mediocre company trading well above its intrinsic value while pessimism can lead to a wonderful company like Shoprite trading below far its intrinsic value.
What does this mean for the intelligent investor?
You have to be fearful when others are greedy (optimistic) and greedy when others are fearful (pessimistic).
The significant differences between market value and intrinsic value arising in the short term are to be exploited.
Wonderful companies will now and then be available cheap.
Be it from a dip in earnings, macro-economic factors….
An investor should obviously buy companies shares when they are currently trading well below their intrinsic value,
When the opportunity arises.
When companies are selling far above their intrinsic values (a bubble),
The intelligent investor should sell.
The market exists to serve you, and not the other way round.
A special Thank you to:
Ms Tala and Aubrey Mokgola,
My economics (CECO011&012) lecturers at the University of Limpopo