Upside surprises (#416)

Simon Shares

Day 167 of lockdown.

• Local Q2 GDP -16.4% (-51% if you annualise it). Makes us one of the worst-hit economies for Q2, not surprising as we did very hard lockdown. Now to get out of the hole and that's going to be the hard part. Of our three main political parties, the honest answer is none of them really have a workable economic policy that we need right now.
• Serious buying of SA inc shares the last two days.

Jeez peeps are buying SA Inc

Top movers in Top40 and MidCap pic.twitter.com/6zgQO5DmHS

— Simon Brown (@SimonPB) September 9, 2020

• Shoprite* (JSE code: SHP) results knocked it out the park. Their Sixty60 app is killing it. My local Checkers has a bunch of full-time staff packing and scores of motorcycles outside. Right now they are well ahead of the local competition and even ahead of Amazon Fresh in the US.

• Aspen (JSE code: APN) sells commercial rights and intellectual property for the thrombosis business in Europe for R12.6billion. They'll still manufacture & supply the product and will retain the EM part of the business. Good deal and reduces debt significantly. On Bruce Whitfield's show Stephen Saad also commented that they'd never issued new shares, all deals paid for themselves. Sure it got wobbly the last few years, but that remains a significant truth.
• AstraZeneca (LSE code: AZN) shares drop 6% after the company announces 'routine' safety pause in a coronavirus vaccine trial. Basically somebody got sick from the vaccine. Happens often but does show the problem with rushing the vaccine. Surely we either do it safely or quickly?

* I hold ungeared positions.

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Surprises to the upside

We're seeing lots of really bad results now that companies results include the second quarter. But the market is expecting this and in many instances not even selling the stock down much if at all as the bad results roll in.

The flip side is that when we see some decent results the market loves that news and sends the stock soaring higher.

This is because right now our expectation is for bad results so good is a pleasant surprise. I have often spoken about the fact that results or other announcements are often not about the actual numbers, rather it is about the expectations relative to those numbers.

What we are seeing is in part a two-part market. Remembering back in hard lockdown when the question was if the rebound would be V-shaped? Or perhaps W, U with some even suggesting L shaped. Well, Old Mutual says actually it is K shaped.

This makes sense. In the US the upper leg of the K is big tech socks with the rest being the lower leg of the K.

Locally miners are the upper leg and financials the lower leg.

So now we can put this together, K shaped recover and the market-loving positive surprises. Hunt out those top quality companies in the lower leg as they're cheap and if they're quality they'll not only recover but will do so quickly and with great profits. This is where we'll find stocks that still have great upside potential.

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