The African Continent, Ready for Growth

June 30, 2019    Portfolio Idea Africa

When looking for growth, China and Asia are often the first that are mentioned. And for good reason. However, looking from a demographic perspective and in terms of possible improvement in quality of life, the African continent may have even more potential.

I will look back at the portfolio in about a year and see how things went. If everything went great, I’ll keep the portfolio and use the formula that I used to create an up-to-date one. If things went south, I may update the rules that created the portfolio and see if I can do better.

And that’s what it is all about: creating a good set of rules that will automatically select stocks for us. No picking of individual stocks and no tracking just the indices.

Africa

For this portfolio, I wanted to select companies that operate in Africa. Turns out it’s actually quite hard to find a list of invest-worthy African companies.

I did find the FTSE Pan Africa Index which sounds promising, but it contains companies that trade on African stock exchanges which may be hard and expensive to trade on. If you like the index, you will probably want an ETF based on that index (which I could not find, but I’m sure it’s bound to appear soon).

So eventually, I just went back to my favorite stock screening app and entered “Africa” as search term. The results were not perfect, but they returned companies which were either based in Africa or have a big part of their business over there.

The Magic Formula

This month, I’m using Joel Greenblatt’s magic formula to select the top 10.

If you want all the details on the how and why of the magic formula, I strongly suggest the book in which it is presented: The Little Book That (Still) Beats the Market. It’s a short and whimsically written book that you can’t go wrong with.

The formula takes into account two factors:

  • Earnings yield: The earnings per stock compared to the stock price. We are looking for companies that make a lot of money, but can be bought cheaply.
  • Return on capital: we want firms that can use capital to their advantage. They can take a little bit of capital and turn it into a lot of revenue.

This Month’s Portfolio

With that in mind, here are the criteria for this month’s selection:

  • Top search result for Africa
  • Highest magic formula score

I hope, in the future, I can figure out a better way to find companies that operate in Africa. Please let me know if you have any ideas.

Symbol Name Current price Enterprise Value Earnings yield Return on capital Greenblatt score
EQX Equatorial Resources Ltd 0.29 AUD -2.73M USD N/A −24.86% 208%
MLBAT Batla Minerals SA 0.50 EUR −2.78M USD N/A 35.43% 208%
TBG Tiso Blackstar Group SE 3.83 ZAR 968.97M USD 354% 6,24% 208%
AEE African Equity Empowerment Investments Ltd 1.90 ZAR −178.69M USD N/A N/A 139%
BUI Barbara Bui SA 8.00 EUR 2.46M USD 133% 110% 139%
CMB Cambria Africa plc 0.0070 GBP 2.02M USD 197% 143% 139%
ERBOS Erbosan Erciyas Boru Sanayii ve Ticaret A.S. 14.59 TRY 40.60M USD 97.85% 144% 138%
IEC Intra Energy Corporation Ltd 0.012 AUD 2.18M USD 179% 47.68% 123%
LON Lonmin Plc 14.70 ZAR −328.41M USD N/A 2.56% 114%
SVB SilverBridge Holdings Ltd 0.55 ZAR 718.89K USD 80.48% 48.91% 115%

Some things worth noting:

  • Most of the companies have a good link to Africa, which is exactly what we want.
  • This is a highly speculative portfolio. Small companies on exotic exchanges with sometimes a negative enterprise value.
  • 3 companies (MLBAT, BUI and LON) have a pretty low volume of trade, which increases the risk even more.
  • Some ‘Earnings yield’ and ‘Return on capital’ fields are not filled because they do not make sense. I think Uncle Stock does a good job at trying to make sense of this and is still able to return a somewhat trustworthy Greenblatt score.
  • I have a feeling the selection criteria will need refining next year, but lets see how this one goes (aka I would not put my money into this selection)

A backtest of this portfolio selection returns wildly swinging results. Going from -13% in 2011 to +88% in 2016. I guess this is to be expected from this type of portfolio. Only buy this if you are highly stress resistant.


My philosophy: If you want to invest and your goal is to try to beat the market, you need a system. You need a system that can decide for you what to buy, when to sell and not to panic when things go down. Everything starts with selecting stock. You should not just select random stock here and there based on whims or things you read. No, create a system that suites your style and follow it. These posts give you example of what such a stock selection could look like.

Unless otherwise noted, I do all my research through the Uncle Stock screener. It's a great tool to have in your belt. (note: this is an affiliate link, if you sign up, I get a commision)

Disclaimer: Don't believe anything I say or write. Always do your own research before making any investment decisions.