True to his contrarian style of investing, Sam Houlie, head of equities at Investec Asset Management, has — with the exception of an overweight position in selected furniture retailers — shunned the entire general retail sector. This is according to a report by Investec Asset Management.
The sector is a current market favourite, but Houlie believes clothing and food retailers are overextended, while acknowledging that they have not yet reached their peak. “This stock view is not an indictment on the general state of the South African consumer. We just far prefer the very unpopular and depressed furniture retailers. Whereas the average retail stock has gone up between 30% and 40% this year, JD group, for example, has declined in price.
“In contrast to the rest of the general retail sector, the earnings of the furniture retailers are significantly depressed and this is more than discounted in the share prices. What’s more, there are encouraging signs that the earnings are recovering, so you’re paying a very cheap price for the recovery that will play out in the next two to three years,” Houlie says.
As a result, both JD Group and Ellerines (via African Bank) count in the top 10 equity holdings in Houlie’s portfolios, which include the Investec Cautious Managed Fund.
Houlie’s current positioning is reflective of the key discipline he employs in his investment process, which has allowed him to build an extremely successful track record over a decade of portfolio management.
This discipline sees Houlie intentionally avoiding or selling into areas of the market he believes to be over-extended and which have high expectations. Similarly, he is very happy to go against the crowd in areas he believes to be significantly undervalued. This approach has meant that Houlie avoided construction stocks in 2007, resources in the second quarter of 2008 and general retailers today.
On the flipside, he has until recently been happy to hold overweight positions in banking stocks for most of the last three years. “They have for the most part been very unpopular, but the valuations were attractive,” Houlie says. Banking shares have been among the star performers over the year to date and he has now significantly reduced his exposure to banks.
Likewise, Houlie is currently bullish on gaming stocks Gold Reef and Sun International, a very depressed and unpopular area of the market.
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