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You're listening to Strictly Business
Podcast with Lindsay Williams.

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With me is Samantha Hartard from Four
Factor SA at 91 in Cape Town.

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And we're going to talk about earnings
revisions as a style of investing,

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as a pillar of an investment philosophy at
91.

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And Samantha, let's get back to basics
first of all, if we can.

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What is your approach to earnings
revisions and why are they so important?

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Why is that style so important to you?

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Hi Lindsay, thank you.

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So yes, you know, what is earnings
revisions?

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I think in short, we're looking to invest
in companies receiving positive earnings

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revisions that trade at a reasonable
valuation.

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You know, markets are forward-looking and
today's share price is a reflection of the

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market's expectations of that company's
future and that includes earnings

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expectations.

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And we're looking to invest in companies
where earnings have been underestimated

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and they start getting revised higher.

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and they traded a reasonable valuation.

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We know that earnings are a key lead
indicator to share price outperformance

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over the medium term.

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We're not looking for companies getting
one-off benefit, you know, it can't be

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things like such as a tax break or
insurance claim that could come

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through and flatter earnings over one
year.

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We're looking for companies that are going
to get multi-year positive earnings

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revisions,

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either from an operating environment that
is suited to them, operating efficiencies

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that management teams could be putting in
place,

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management taking decisions that could
create competitive advantages,

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strategic advantages that will see these
companies continue to receive positive

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revisions of the medium term.

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Okay, so let me put this into layman's
terms now.

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I love examples.

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Let's say that Hartard Industries put out
a voluntary trading update on the Stock

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Exchange and

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YouService to say It's with reasonable
confidence that we expect our earnings per

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share and headline

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earnings per share to be between 10 and 12
percent higher over the period under

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review.

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And you look at it and you say, OK, that's
fine.

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That's what we expected.

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Then two months later, Hartard Industries
comes out with it is with reasonable the

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same stock exchange

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new service voluntary update.

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It's with reasonable confidence that we
expect.

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The company's headline earnings per share
and earnings per share to be between 17

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and 20% higher.

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That immediately alerts you.

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Is that correct?

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Yes and no.

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So, you know, when a company releases a
trading update or their financial results,

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that news is then, you know,

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captured into the share prices.

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So a company comes out and guides, as you
said, 5 to 10%, some with points of 7.5%

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up.

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The market already knows that.

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And what we're looking to do and our
analyst team is looking to do, see what

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the market is missing.

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So that obviously involves a lot of
fundamental bottom-up research by our

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analyst team,

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seeing what the outlook is for the
companies, their operating environments,

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what the management teams are doing.

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And we measure where our
analysts'expectations are relative to

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consensus expectations.

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And that is such a key, pretty much the
starting point, the key focus of where we

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go as a team.

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And if we see that our analysts are...

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comfortably ahead of market expectations
let's say 10 12 above um where consensus

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is that's a really strong steer

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for us that this is a great idea let's
have a look at what the valuation

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multiples are trading at the moment for
this company um and that would be

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our bread and butter you know we'd say our
you know earnings 101 earnings revisions

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101 um so trading up

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there comes through at seven and a half
percent let's say the market was expecting

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that stock to to you know be growing at
about 15 percent i

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mean And of course, that would be taken
very negatively.

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You'd see probably earnings expectations
getting revised lower, the stock derating.

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But that also presents an opportunity.

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Has the market overreacted?

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What does our analyst see?

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Could this be the bottom of a negative
earnings revision cycle and the start of a

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positive trajectory to come?

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And that's where the debate takes place
with our team.

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Relative to consensus expectations is a
very key phrase.

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And I've been talking about the revision
style of investing with you and your

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colleagues over the years.

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Thank you.

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That's the first time it's really sunk in
with me, but also the market reaction as

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well.

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I mean, if the market reacts before you
can react, then, of course, the moment is

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lost.

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When does it and when doesn't it work?

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Are there economic cycles where this sort
of thing doesn't work?

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Tell me failures and successes or other
examples of.

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Yeah, look, you know, no investment style
works all the time.

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You know, we wish they would and earnings
revisions included.

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And for us,

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it is at inflection points in the economic
cycle or market conditions that don't suit

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our investment

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philosophy.

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When share prices start to decouple or
become uncorrelated to what the earnings

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revisions

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profiles have done with companies.

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Market conditions that most suit us are
upwardly trending markets where you can

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see clear movements in earnings

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expectations, how they are changing.

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and therefore share prices being able to
react and start to price in those changing

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or evolving earnings

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expectations over the medium term.

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The investment opportunities in this style
obviously go through phases, Samantha.

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I mean, there'll be times when there are
revisions, downgrades, and that comes to

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my next question, which is.

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If you're already holding an asset, a
security, and suddenly there are revisions

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to the downside,

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and it may not be just for one quarter or
one half year, but for a full year, do you

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say to yourself, okay, I'm going to get
out of this company.

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It doesn't just work on the upside where
you want to get into the company or

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increase your holding.

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It can also mean disinvesting.

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Yes.

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So, you know, there are two elements to
the investment philosophy.

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Our bread and butter is when a company is
trading at a really reasonable valuation,

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or in fact, cheap.

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in our minds and is getting positive
earnings revisions, that's exactly where

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we want to be placed.

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And companies that are trading at very
high valuation multiples get negative

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earnings revisions.

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That's exactly where we want to avoid.

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The two areas where there are most debates
in the companies or on the team is where

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you're talking to.

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So we've gone through a period where we've
invested in a stock, it's getting strong

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positive earnings revisions,

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it was trading at a reasonable valuation
at the time that we entered into it.

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And what inevitably happens is that the
market starts to...

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to price in this positive outlook,

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starts to price in this growth that the
market had previously underestimated.

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And it's at that point, let's say, you
know, after a 12-month or

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24-month horizon where the market's caught
up to our analysts that we then debate

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with ourselves, okay,

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have market expectations now caught up to
where our analyst is trading at the

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moment?

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And therefore, should we start looking to
take profits in that name?

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It is at those points in the cycle that we
become most sensitive.

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And typically, yes, that's where we would
start to reduce exposure and take profits

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on those names

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after a very strong re-rating.

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And we think that the momentum in the
positive earnings trajectory is about to

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slow or stop.

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But remember, the flip side of that is
also really powerful.

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If there's a stock that has been
expensive, it's been going through a

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period of negative earnings revisions.

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But analysts turn to us and say, actually,
we think this is the end of the negative

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revision cycle.

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That can also be an equally strong steer
for us to say, this is a great opportunity

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to review and perhaps take exposure.

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Final question.

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Actually, it's not the final question.

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I've got two.

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But the first of the final two is, you
know, I spoke to one of your colleagues,

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I think it was Hannes van den Berghe a few
months ago, and we spoke about earnings

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revisions.

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And the podcast was crackling with
optimism from his point of view.

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He said, we are seeing so many
opportunities.

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Is that what you found recently?

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Absolutely.

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And in fact, it continues.

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So I think you may have spoken to him in
the second quarter of this year, pre the

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election.

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And what we saw post the election and the
formation of, you know, the government of

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national unity, the GNU,

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as we call it internally, is that a lot of
the South African ink names actually

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rallied quite strongly.

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So you've seen the banks up.

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You know, 30% the retailers, up 30%
insurance,

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insurers up 30% since that year new
announcement.

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In our minds, that was really the market
just re-rating so many of our sectors back

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to their

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long-term average PE multiples.

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The next leg of the cycle and why we're
still excited is that we think that the

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positive earnings revisions trajectory
still needs to come through and it is

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being underestimated by the market.

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You know, the work that our retail
analysts, insurance banks analysts have

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been doing are showing far greater upside
to where

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earnings expectations are today.

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And so we think that this market in SA
still has legs to go,

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despite the strong start that you've had
over the last four months.

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You've answered the second part of my
final question, Samantha.

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Thank you very much for your analysis.

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And again, the optimism comes through
chatting to you today.

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Samantha Hartod is from Four Factor SA at
91 in Cape Town.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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various contributors and do not reflect
the policy,

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position or opinion of any other agency,
organisation,

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employer or company associated with
StrictlyBusinessPodcast.com.

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Assumptions made on the analyses are not
reflective of the position of any other

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entity other than the speaker or the
author.

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And since we are critically thinking human
beings, these views are always subject to

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change,

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revision and rethinking at any time.

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Please do not hold us to them in
perpetuity.