Stock picks: A few special opportunities

Investors who like to invest for themselves and portfolio managers investing client funds all have the challenging task to find shares that will perform well. The pressure is on to outperform a stated benchmark, or at least do better than the other portfolio managers who are looking to get new clients to grow their books.

There are also hordes of speculators with the single aim of choosing a few shares that will run a lot, hopefully soon.

Listen/read: The problem with ‘just tell me what to buy’

Justin Floor, head of equities at PSG Asset Management, says it has become more difficult to get good returns from investments as most equity markets around the world face severe challenges and a multitude of risks.

“Valuations and company profits are high in the largest parts of the market, in particular the US. This is a headwind to future real returns,” he says.

Furthermore, the macro landscape is “deeply uncertain” with an unpredictable global trade environment (geopolitics and erratic tariff policies playing a role), geopolitical tensions and polarisation, high and sticky interest rates and the prospect of a slowdown in growth.

“Investors don’t have to look far to find sources of anxiety these days.”

Local investors realise they face even more risks when investing in SA shares, because there are a magnitude of domestic risks piled on top of the global risks.

There are many examples of this.

Read: South African deputy minister’s firing tests coalition

Most recently, uncertainty about SA’s coalition government after the removal of the deputy minister of trade and industry coincided with US President Donald Trump’s imposition of tariffs on SA imports to America.

Where to look, and how to look

“Special situations hold the ability to deliver uncorrelated returns, given the outcome is wholly dependent on corporate events or transactions and not necessary tied to the performance of the market as a whole,” says Floor.

“Special situations deserve closer attention as they aren’t linked to economic growth.”

Special situations encompass a range of corporate actions and transactions that include mergers and acquisitions, share buybacks, asset sales, debt reorganisations and spin-offs or the issue of new shares.

These actions can materially impact a company’s value or alter the future course of a business.

“Due to their ‘special’ nature, special situations provide a driver of company performance that is not dependent on economic growth and that can be material in delivering investor outcomes, even in turbulent market conditions.

“In most cases, equity returns are unlocked as the market prices in a corporate or regulatory event,” according to Floor.

As such, these events have the potential to unlock value for investors, and importantly, they are not directly dependent on the economic growth trajectory.

The huge share buyback programmes instituted by Prosus and Naspers are good examples, having added billions in value for shareholders.

Why it’s worth looking …

“Investing in opportunities driven by special situations can help to drive overall portfolio returns, even during difficult periods in the market,” says Floor.

“They add a source of return that is not correlated to market performance, and perhaps not correlated to the rest of the equity portfolio.

“If special situations are well understood and entered into at an attractive price, they can introduce equity-like returns at a lower risk profile than that of other equities. Having a collection of special situations in your portfolio helps diversify this idiosyncratic risk even further.

“However, special situations are often overlooked by the broader market.”

Floor says there are a few reasons the market prices special situations incorrectly, and why investors are not exploiting the opportunities.

“The broader market often finds it difficult to price the impact of an event correctly, as they require deep research and a good understanding of the businesses in question. Sometimes the situations are fairly complex.

“Special situations often exist in smaller companies that are off the radar of analysts at big investment houses. At times, the companies and actions are misunderstood.

“This means that mid-sized managers are often better placed to take advantage of them,” he says.

Floor says that adding a few “special situation” shares to a portfolio can help to add a margin of safety to a portfolio because special situations are often not fully reflected in valuations.

“Independent research is critical, as fully unpacking the impact of special situations requires a detailed analysis of the company in question.”

A few shares

Floor says PSG Asset Management has identified and researched a number of special situations to be included in portfolios.

Read: ChatGPT’s JSE portfolio looked smart … until it added Distell and M&R

“We are watching their development with interest, and believe all of them have a good prospect of contributing to portfolio returns in the future. Importantly, we expect these events to occur at varying times. The potential to introduce uncorrelated return drivers into our portfolios is very attractive,” he says.

Super Group

Super Group is on the list, as a result of the recent sale of its Australian subsidiary.

The share jumped from a low of R22 in November 2024 to above R30 a few weeks later after Super Group announced that it would sell its 54% interest in SG Fleet to another Australian company for billions.

It declared a special dividend of R16.30 per share, R13.04 per share after dividend withholding tax.

Nampak

Floor also punts Nampak. He believes the packaging company will turn around after getting new capital by way of a rights issue and after selling some assets. Debt will be much lower, giving space for better results and, in time, an increase in the share price.

AECI

AECI is included on the basis that it is selling non-core assets and reducing its cost base.

The consolidation of the global mining explosive industry could also benefit AECI, and investors will eventually wise up to the share’s potential.

enX Group

Floor believes enX Group, which distributes chemicals and lubricants, will divest more of its assets after selling the greater part of its assets. He hints that the listed entity might even sell everything.

When enX Group announced the sale of Eqstra in 2024, management said the disposal “constitutes all or a greater part” of the group’s assets in terms of Section 112 of the Companies Act. Part of the proceeds of R1.1 billion was used to repurchase shares and it had already paid two special dividends.

The net asset value per share, per the financial statements and after adjusting for the recent special dividend, is R7.10. The share price is R4.70.

Telkom

Floor says investors are also not realising the impact of changes at Telkom and the potential of its investment in fibre networks.

Any special international opportunities?

Moneyweb asked Floor to give us two international shares too, seeing that he mentioned international markets and that SA asset managers have been building up their international research capacities, PSG Asset Management included.

He says Tripadvisor offers value.

“The recent transaction has simplified a complex dual class holding structure and materially the number of issued shares.

“The company is exploring strategic options to create value for shareholders, including the sale of assets and mergers, as well as being open to bids for the company as a whole.”

Read: 2025 has been kind to the JSE – but not to most shares

Floor also notes that CK Hutchison, a Hong Kong group invested in shipping ports around the world, is trading at a big discount to its net asset value and has announced some disinvestments.

“The company is set to unlock value through the proposed sale of world class port assets and the merger of its mobile interests with Vodafone.

“Further transactions that will unlock value in its vast portfolio of interest are possible,” he adds.

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