Super stocks outperforming Ponzi schemes
Published:Friday | September 9, 2011 | 12:00 AM
Steven Jackson, Business Reporter
Equities are slowly reasserting their place as one of the best long-term investment propositions, and are now outperforming even the biggest of the investment schemes in their heyday before their spectacular collapse.
Stocks such as Jamaica Money Market Brokers (JMMB) and Lasco Distributors have generated super returns since January, bettering even the triple-digit gains made under the unregulated Olint and Cash Plus schemes.
Concurrently, 10 other active stocks returned high double-digit returns over the period, while the wealth held in junior market stocks rose to a high J$16.5 billion, up nearly J$900 million in August alone.
Experts inside the Jamaica Stock Exchange (JSE) and investment firm Stocks and Securities Limited (SSL) reject the description of the market as a bull caught in a bubble.
They cite legitimate driving factors as strong financials and the waning attractiveness of single-digit government paper rather than hype.
Specifically, JMMB's price on the main JSE index increased 176 per cent year to date to J$11, while Lasco's price on the junior index increased 154 per cent since January. JMMB's price increased 54 per cent in August alone.
Most of Lasco's rise occurred earlier this year; however, at least one analyst thinks it will rise 240 per cent by year end, based on its expansion plans and strong results
"SSL has a 12-month price target of J$14 for Lasco Manufacturing and J$12 for LASD," said research analyst Kimberly Thelwell.
Lasco Distributors and Lasco Manufacturers traded at J$3.50 and J$5.57 in January, respectively, before rocketing to J$9 and J$8.66 by August 31.
"This price appreciation is not unusual given that these stocks were new listings, with strong upside potential due to the attractive IPO valuations," said Thelwell.
The double-digit gains included Dolphin Cove up 70 per cent; Barita Investment, 68 per cent; Lasco Manufacturers, 50 per cent; National Commercial Bank, up 45 per cent; Berger Paints, 45 per cent; Caribbean Producers Group, 35 per cent; Kingston Wharves, 35 per cent; Pan Caribbean Financial Services, 33 per cent; Gleaner Company, 28 per cent; and Jamaica Producers Group, up 26 per cent.
Stock market drivers
Thelwell said drivers of the stock market include declining yields on money market investments.
And: "Many investors have found a home for their money with approximately J$130 billion of Bank of Jamaica certificate of deposit maturities entering the market each month," she said.
The JSE reasoned that it was strong profit performance.
"I agree that almost all the companies have provided excellent returns to the investors, but we have seen that this is based on the strong financial results of the companies," said Marlene Street-Forrest, general manager at the JSE in written response to Financial Gleaner queries.
For instance, last month JMMB announced a J$4.2-billion takeover of Capital & Credit Financial Group in a combination cash and shares deal. JMMB said it would pay up to J$4.55 per share for CCFG. At the same time, it reported June first-quarter profits of J$951 million, a fivefold improvement from J$177m in Q1 2010. Interest income underperformed in the quarter — falling from J$2.4 billion to J$2.2 billion — but JMMB overcame the J$200m slide with massive savings of half-billion dollars on the cost of writing business, and a near fivefold increase in gains on securities trading.
Undervalued companies
Despite the strong price appreciation many companies on the junior market, Street-Forrest said, continue to trade below the market price to earnings (P/E) ratio, which hints that they are undervalued.
"These are good growth companies. The Junior Market P/E ratio is just over nine and the performance of the index is 490 per cent. I am pleased that we have had excellent performance on the market and expect that as these companies have produced good results," said the JSE manager. "There is still good value in these companies that have listed."
Lasco Distributors made J$306.5 million in net profit from J$6.75 billion in revenues for its financial year ending March 2011. In June, Lasco group chairman Lascelles Chin announced a US$11-million (J$943 million) factory investment in sister company Lasco Manufacturing Limited to grow that business. The investment will increase capacity at its White Marl, St Catherine factory by 70 per cent, enabling it to launch new product lines and come close to doubling sales by 2014.
Street-Forrest objected to the comparing of these returns to failed Ponzi schemes of Olint and CashPlus, which crashed 2007-2008.
Last month, Olint boss David Smith received a 30-year sentence in US courts with prosecutors declaring Olint a Ponzi scheme that scammed 6,000 victims of more than US$220 million.
"Let me just make the point that investors investing in the companies listed on the junior market are investing in companies that are producing, are transparent and are investing as shareholders in live and living businesses. Returns, therefore, are transparent and can be validated. But for the fact that the companies listed on the Junior Market have provided excellent results to date, the comparison with Cash Plus and Olint does not exist," she said.