Buy a Share When The “Mountain is Behind You

Jan. 30, 2012 - PRLog -- They say that you should buy a share when the “mountain is behind you.” In other words, the share has recently fallen quite strongly and may be offering a buying opportunity now. The construction sector has built this mountain and while most of them are still trading below their 200-day moving average and the trend remains bearish; they offer value. The construction sector was the darling of investors until a few months ago but may be perceived as the ugly duckling now. But that is exactly what a value investor would be looking for.

It has been a tough time for all construction companies, while competition is particularly fierce in South Africa’s construction and engineering-related space.  Industry stalwarts such as Murray & Roberts, Group Five, Wilson Bayly and Esorfranki have recently all been swimming in red ink. For some, exposure to nervy foreign markets such as Dubai has been a burden; some also face non-payment for projects here at home and abroad, and many have fallen foul of the Competition Commission’s probe into industry collusion. Two smaller construction companies that offer speculative appeal are Raubex and Stefstocks.

Raubex is a construction company with a market capitalization of R3.62-billion. It seems well positioned in the short term to continue to benefit from continued demand for infrastructure locally and expanding its footprint further into Africa. The group is good quality company with good margins, a high ROE and strong historic cash flow. Trading on a rolling PE ratio of 7.6 times and 1.4 times NAV the share offers value. Technically, the share is still in a bearish trend but seems to be moving out of oversold territory.
Stefanutti Stocks Holdings business activities cover a large spectrum of the construction industry. The group, with a market capitalization of only R2.1-billion, has a healthy balance sheet and a decent ROE. Trading on a rolling PE ratio of 6.3 times, we feel the share holds value, however it is already evident that the group's strong historic performances will not be sustainable. The share price has moved above its moving averages but the shorter term moving averages must still cross over each other and both point upwards before the trend can be called bullish again.

Investors are reminded that the construction industry is cyclical in nature and that the levels of recurring income are low. As a result of this and the uncertainty of future prospects we recommend both shares as buy only to the speculative investor with a good understanding of construction sector.

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In the world of finance a “share” refers to a unit of account for various financial instruments including stocks, limited partnerships, real estate investment trusts and mutual funds such as exchange traded funds or unit trusts. In certain parts of the world the word share refers to stocks and for all intents and purpose has replaced the word stock altogether.

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