Starting on page 147, we bring you the ranking of top performers, the companies that every trading jockey wishes they had invested in. Some got it right. Most got it wrong.
Stock market performance is driven by opinion. Often, share prices appreciate not because of an intrinsic change in company performance, but because of a change in sentiment.
And the main driver in the calculation of internal rate of return (IRR) - which is what companies are ranked on in the Top Performers table - is share price performance over five years, averaged out for each year. Dividends or special distributions are considered to have been reinvested during the period.
So, while Messina took top place last year and kept it this year, consider that 2001's top performer was the now disgraced and suspended Tigon. Evidence is emerging to suggest that Tigon's share price performance had little to do with normal market forces and rather more to do with the shenanigans of management. Criminal charges have been laid against the two most senior directors, CEO Gary Porritt and executive director Sue Bennett.
Datatec, which rose on the tech bubble and has since fallen out of investors' favour (though in a different league from Tigon), was first in 2000. Datatec has recently recovered from its lows, but now ranks only 250 .
Management often has little to do with a company's share price. At an Investment Analysts' Society presentation last year, Joel Stern, proponent of the "economic value added" measures of company performance, cited a Chicago University research paper that showed a company's share price was affected only about 25% by management. In other words, 75% of what influences the share price is out of the company's control.
In using a five-year calculation, we have tried to counteract one-year wonders and temporary rallies. That should better identify the companies where management is making a long-term impact.
Excluding penny stocks, the top performer in the past year was Cullinan, a 100-year-old industrial business, which gave investors a 163% return (see page 146). On a five-year view, Cullinan also sneaked past the resources heavyweights into ninth place.
And on the long-term view, Messina would have more than doubled your money in each of the past five years.
Though not at those high levels, most other JSE shares have done well. The average (unweighted) return of the 200 Top Performers is 17%/year, certainly a better return than leaving cash in a bank account.
A falling interest rate makes the case for investing in equities even more compelling. But investors have been burnt during the past three years of meltdown in global markets. The flight to quality continues - those who are still putting cash into equities are sticking to blue chips.
And who can blame them? In a recent survey by the London Business School and ABN Amro, it is estimated that the total wealth destroyed in the global equity market slump of the past three years has been US$13 trillion, equivalent to $2 000 for every man, woman and child on the planet.
Of course, the heady heights of the stock market bubble gave investors mainly paper wealth. The actual amounts that investors lost - the difference between the cash invested and the cash recovered - is certainly a much smaller number.
For most investors, though, the past few years have delivered a painful smack to their investment returns.
The variation of performance between sectors makes choosing future investment winners even more difficult. Consider that in 2000 three of the top 10 performers were IT stocks, and not one was a resources company. This year, seven of the top 10 are resources companies, and not one is in IT.
Of the once-glorious IT stocks, only Comparex still makes the top 200 list - at 100. Datatec at 250 and Didata at 251 have each lost investors on average 27%/year for the past five years.
In contrast, investors who are prepared to take risks have found fertile ground in the resources sector for some years. But that rally looks to have come to an end.
Resources came into their own in late 1998 when the rand slumped during the crisis in emerging markets. Almost every year since then, investors have been talking about the end of the resources boom and only this year did that materialise. Until the past year, making money in resources stocks was like shooting fish in a barrel, thanks to the combination of the weak rand and rising commodity prices. But the rand's recent strength has made these stocks unattractive investment prospects.
Not only mines, but other rand-hedge stocks such as manufacturing companies are moaning about the "strong rand" and how it makes them globally less competitive.
The pressure has eased a little of late. After appreciating steadily since the beginning of 2002, the rand lost 12% in May and seems to have set itself on a depreciating pattern since then. And that trend has been reinforced with the Reserve Bank's 1,5 percentage point cut in the repo rate in June. The cut beat market expectations but the rand showed no immediate reaction. Nevertheless, a loosening bias has been set, and already talk is turning to further cuts in August. So the stage is set for the rand to enter a weakening phase. Resources may regain their shine as a result.
Looking at the top of the performers table, Messina is a company that has been around for almost a century. Over the years it has had various owners, most recently Canadian company Southern Era Mining, which holds 70%. Its ranking here is doubtless supported by its low tradability - only 63 000 shares trade on average in a month. That makes it a less than perfect target for investors.
After Messina comes Mvelaphanda Holdings (Mvela), controlled by Tokyo Sexwale. It doesn't have the problem of low liquidity (see page 138).
Fourth-placed Aspen stands out from the resources-dominated list. It is an aggressive contender in the pharmaceuticals industry, a sector it dominates as a listed company. In only four years, it has invested heavily in productive capacity to be able to supply much of SA's demand for generic medicines, and is still building. It supplies more than 650 products. It has benefited from the production of generic Aids drugs, a market that, unfortunately, is growing rapidly. If government sticks to its commitments to provide antiretrovirals to all people with HIV/Aids in SA, Aspen could be a major beneficiary. Add to that its forays into Australia and the UK and the future could be bright indeed. Expansion has meant high debt levels, though.
The company that takes its spot without any caveat is Impala Platinum, which is also the Top Company this year. At number three in the Top Performers rankings, it has delivered a five-year IRR of almost 80% and is the choice of most mining analysts for the title of best platinum producer.
As the FM's Brendan Ryan recently pointed out: "If there was a safe bet in the overheated resources sector last year, it was platinum shares. And Impala Platinum (Implats) was the pick of the bunch."
A negative for Impala and other platinum producers is the draft Mineral & Petroleum Royalty Bill. Impala has been through a couple of other negative events but it looks as if the share price may be stabilising again.
This, of course, may change again as a result of Gencor unbundling its stake in Implats in June. The resulting extra liquidity in the market could add to Implats' volatility.
Mining legislation has also made life tough for Implats-controlled Barplats, Northam and Gencor, which has disappeared since it unbundled its Implats shares. Top-placed gold-mining company Harmony is also suffering under the regulatory burden, but its recent merger with ARMgold puts it on a firm footing in the empowerment stakes.
Falling just south of the top 10, clothing manufacturer Pals has been a quiet but consistent performer, though with a market cap of R21m and low liquidity it is not of interest to most investors. With 70% of its menswear sold internationally, it is sensitive to the value of the rand and to offshore consumer confidence, neither of which has gone its way lately. Consequently it has fallen 25% in the past few months.
Just as some stocks are helped by sentiment, others are damaged. Certain companies have not performed well in terms of share price movements and yet their intrinsic performance belies this.
A case in point is Grintek, a small-cap electronics company that has been languishing for about 18 months now. Its order book looks good, its workforce is highly professional and its products are world-class. Profit warnings and earnings declines have spooked investors, though. It has been a lousy performer on the JSE so far this year and is now trading at not much more than a third of its 2001 peak.
It still comes in at sixth on the Top Performers table, largely because the calculations are based on returns up to December last year. At that stage it had delivered investors an average 74%/year return for the past five years. Since then, though, the market appears to have discounted its good technology and strong management.
A host of small to medium-sized companies may be ready to scale the Top Performers table next year.
Reunert, for example, at 25 in the ranking, is a high-quality company. It has been turning in particularly impressive results for the past four years. Its last set of results was disappointing, however, because management had not hedged its foreign currency exposure.
Another is Cashbuild, which just makes the top 40 performers. This company has been reaping the benefits of a relative boom in the low-cost housing market, as people buy new houses or renovate existing ones. The share price has been a great performer in the past year and there appears to be more growth left in Cashbuild and in the sector.
More established stocks are encountered lower in the Top Performers table. Richemont, interestingly, only just scrapes into the top 50, even though it is a complete rand hedge. Anglo American is just outside the top 50. VenFin, the Rupert family's large private equity fund, comes in at 57, which is a good showing for a company whose main assets are in relatively unfashionable information technology, though it does have Vodacom in its stable.
What other sectors could be rocketing up the table as next year's Top Performers?
Financial stocks are still waiting for their moment in the sun. Fund managers have been urging "sector rotation" from resources to financials, but they have been wrong.
The highest-placed financial stock is brokerage Alexander Forbes at 102, which has made investors a below-average 12%/year. At 111, Standard Bank is the highest banking stock. Hollard-controlled Clientele is the highest-placed insurance stock at 136, a few places ahead of Mutual & Federal.
Insurance companies are in many ways proxies for equities. Their assets are so intimately connected to shares that they mirror what happens on equity markets. As markets have waned all over the world, so have the fortunes of life assurers. So not much solace there.
Concerns over declining economic activity have tempered investors' views of profit growth in the banking sector. The fundamentals just don't seem to be there, though investors may well choose to run into banks purely as a countercyclical play against resources counters.
Industrial stocks don't look wildly attractive either, with the exception of some of the clothing retailers. Edcon, Foschini and Mr Price have all reported good results recently and that trend looks likely to continue for a while.
Many of these retailers have restructured to the extent that they are now far less vulnerable to downturns in the economy than they were even five or six years ago. Edcon's position at 193 is set to change next year, as are Mr Price's 83 and Foschini's 170.
Industrials that enjoyed a small rally as their export prospects blossomed are now hostage to the volatile rand. Sappi (20) and Ceramic Industries (28) are typical. Both are solid diversified businesses (Sappi much more so), but their share prices will remain a function of the rand.
Technology, media and telecom stocks have been in steep decline since early 2000. Yet in SA the fundamental demand for technology products is rising. The tech industry here is worth R50bn and growing, but it's difficult to find a decent tech company in which to invest. There are just too many listed tech companies, so it's unlikely that this sector will be rewarding for a while.
Even if the bleeding stops in these counters, they are unlikely to get back on the strong growth path they were alleged to have been on during the dot-com age.
The top-ranked pure IT stock, Aplitec - a well-managed company with strong prospects - is only at 88.
So much depends on the rand, it is impossible to make predictions for next year's table without some view on the currency. And guessing the direction of the rand has proved almost impossible for most so-called experts.
