Buying stocks can be scary, businesses less so

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Well another month has passed, and for me the stock market has not been a good place. I am invested in mostly small and medium cap shares in South Africa, and to be quite frank, the market has been terrible.

The reasons: Political instability, recession, lack of liquidity in these shares, and people just giving up on some of them.

Now you might think this has depressed me no end, and you would be partly right. Nobody likes to see their net worth decreasing on a sometimes daily basis. You may detect though that I am not totally downhearted about this, and in fact to some degree I take a certain pleasure out of it.

The reason for my pleasure can be traced back to the father of value investing, the man who Warren Buffett says he looked up to the most in investing, Benjamin Graham. He spoke of a Mr Market, who was a manic fellow at the best of times, sometimes happy and sometimes downright depressed. The only weapon we have as investors he said was to ignore Mr Market and to control our own emotions. He also said that the best time to buy was generally when Mr Market was depressed and throwing away good businesses at knock down prices. In my market, I believe that time is now.

I have been doing a fair amount of buying, and selling a long term holding which I have lost some faith in, in order to fund my purchases. I will not go into all my activity, but will touch on one stock I have been buying. The reason I will do this is because, like the title of this article alludes, we are buying businesses, and the key is not to just think of stocks as pieces of paper.

Buying a boring old packaging business

I have been accumulating shares in a company called Bowler Metcalf (stock code BCF on the JSE). This stock has been listed for 30 years on the stock exchange, has been consistently profitable, has no debt, has cash on the Balance Sheet, and most importantly of course, pays dividends! They make things like the plastic containers that are used for your bathroom cleaning materials and tubes/containers that hold cosmetics etc. They generally make the more specialized ones with advanced nozzles, but lets leave it there, I did say boring.

The share price though has been terrible, it is probably down over the last 5 years. Part of the reason for this is that a number of years ago the company bought into one of their clients, a beverage company which makes soft drinks. Subsequently they have merged their stake into a larger entity called Softbev, which is now a national beverage company which sell various soft drinks and energy drinks, as well as being the Pepsi bottler in South Africa. Unfortunately Softbev has had various teething problems, and Bowler Metcalf has had to write down the value of their 42% stake in Softbev.

The thing is that even if Softbev was worth nothing, which it certainly is not, then the core business of Bowler Metcalf, which is plastic packaging, is worth far more than the value the market is currently valuing it at.

I have recently bought some shares at R5.65, and a recent trading statement said that core earnings would be 65-82c, placing this business at an earnings multiple of 6 to 8. This for a well run business, that is conservatively managed. You effectively have a free option on Softbev, which may be listed as a separate business.

This is why I say stocks can be depressing, but businesses less so. This business is situated in my home town of Cape Town, so I go off to the AGM every year to hear the directors discuss prospects for the year. I see their soft drinks, including Pepsi, in the supermarket. I see this as my business, albeit as a minority shareholder. I enjoy reading their annual reports, which are easy to understand, being a fairly simple business.

I find a lot of comfort in a business like this. I have a few shares, such as Choppies, which is a supermarket group which has the whole of Africa into which it can grow, which could shoot to the moon over time, but equally fall flat on it’s face. Bowler Metcalf though is like a trusty old friend, somewhat boring, which keeps churning out profit and dividends. Unlikely to make me wealthy, but like anybody owning a business, I would like it to keep feeding my family and providing for my needs, and the stock price does not bother me, because I have no plans to sell something so important, especially to that horrible Mr Market guy!

Disclaimer: I have been discussing a small company I like, it is not a recommendation though, as all shares carry risk. Do your own research.


8 thoughts on “Buying stocks can be scary, businesses less so”

  1. Like you, I also have a a fair amount of exposure to small caps and have watched the ALSI hit new high while my portfolio has been in the doldrums. It has made me question my portfolio choices. But on the whole, they have been publishing good results – just out of favor at the moment – so not too worried. Currently build positions in ANH and Trencor. Would also like to add to Balwin – basically want growth AND a dividend. In my income portfolio looking to add to SSS and SRE.

    Back to a previous question – have accounts with EE and Absa. Started when EE was not around, hence ABSA, but quite like having an income producing portfolio and a portfolio geared for CGT. I have a lot of shares – more a collector than an investor! Own everyone of those overseas REITS you had listed BTW . Ja, I just like reading SENS!

    Nether choppies or BM tickles my fancy. BM is so SA consumer focused – and Pioneer (pretty savvy operators with great distribution and bulk) could not get Pepsi is work.

    Cheers for the article, always enjoy hearing other people view.

    BTW do you ever buy a share to trade, or are you always looking for a long term hold?

    1. Hi Alec,

      It has been a frustrating time for sure, but that is usually a bad time to change strategy. If you are invested in sound businesses it should pay to stay the course. I am a big fan of Balwin, I think it will eventually do well, but it is fairly risky being a property developer. ANH a good company but does not suit me currently given the value in smaller caps. I hear you on Choppies and BM, not for everyone.
      The only stock I am wondering about is ALP, there was a cautionary out, but am in two minds about this stock, whether it worth keeping. Thought about putting more into SSS if sold ALP, like that they going into UK.

      I am predominantly a long term investor, although sometimes the market throws up something to good to ignore, even if it for the short term. I will also have a big CGT bill due to a 10 bagger small cap I have now totally liquidated, and the tax loss on some small caps can sometimes be used to offset this in conjunction with an uptick off very depressed levels, thereby making a capital profit and tax saving in one go. I have been buying GPL at R2.70 with this in mind, hoping it will go up with results. If it does not then I am stuck with it, but it will be ok as NAV worth double that and I will hold.


  2. I have a bit of a different view on stocks that do not want to “go up”. Currently I would actually prefer my REITs to continue to fall in price while still steadily increasing their divs! It supercharges my ability to reinvest, and I will (hopefully) only need the income ~15 years from now.

    I also own ILU, BWN, and SSS. I would like to add EQU, but the current price is too high for my liking…

    1. Hi Johnny,

      I would agree with you. I have a few stocks that I feel I have enough of, or do not want to add to the position, and for these seeing some capital growth is nice (or would be nice..). However, for the majority of my stocks I am wanting to add to them, especially in the current time where prices are very low. It is a great advantage to be able to add to your holdings at a lower price, it is like buying a future salary on the cheap. My only problem now is that I do not have fresh capital to invest, I will in fact be writing a post soon on how I will need to grow my portfolio organically for some time now as there are no stocks I wish to sell anymore so I will be relying on dividends to reinvest, and where they are REITs it is far better to have cheap prices.

      As to specific stocks, I continue to hold BWN (big holding) and ILU. SSS I hold and would love to increase, I will reinvest the div if that option given again, as I like the UK acquisition which will mean the stock is also a rand hedge. I did look at EQU some time ago and thought it looked good, but was a bit expensive then too. I also own TWR which has had a few setbacks but I am positive on.


  3. I have both TWR & TEX on my watchlist…But something just makes me a bit cautious of TEX specifically. They’ve had something like 3 or 4 different CEOs in ~2 years. Just sounds odd…

    Another one I recently discovered is FVT, very much a small cap REIT, but they’ve had some excellent growth since 2013 with yield growing 9-10% pa. They also have the option of div-reinvestment which I quite like for tax purposes. Oh and, their current NAV is 218cps, price @ 200cps, which I also quite like!

    Regarding buying more, I am in the same boat. For the next 3-6months I will probably only be able to reinvest distributions. But this is also the cool part, seeing how my investment starts feeding itself!

    1. Funny that, I also looked at TEX and despite the high yield felt something was not quite right. I know they were quite exposed to Edcon as a tenant and Edgars almost went under. Will look at FVT.

      Look out for my post next week, I think you will enjoy it.


        1. Hi Johnny

          I have just posted the new post. I thought you may enjoy it as it is about growing ones portfolio when new cash to invest is not necessarily available. Hope you will find it interesting.


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