ARTICLES

A Story About Focus

The sale of CNA by Edcon, as part of its rationalisation and re-focus, is long overdue. There has really never been a good reason for Edcon to own CNA because there are no synergies between the two businesses. Edcon is in the clothing and fashion business – what has that got to do with what CNA does?

CNA itself seems to us to be completely defocused. What business is it in? Do they sell stationary? Because, if they do, then they do a bad job. Waltons sell stationary and that is all that they do – they have every stationary product and great expertise in that product range. Does CNA sell music? Because they have a lousy selection and their staff has no real expertise in music. If you want to buy music, go online or go to the CD warehouse in Sandton – they have every music CD that has ever been made and a staff that has enormous expertise in music. And the questions go on – Is CNA selling computer products or sweets or cell phones? What are they trying to do? They don’t seem to know - and the result is a business limping along with very poor profits for years.

Probably the most important rule in business is to remain focused. The key is to do one thing - and then do it exceptionally well; to become an absolute expert in your business. When companies become de-focused, they lose their way, management’s attention is diluted and sooner or later profits decline. Consider this instructive story about a JSE-listed company, told by an experienced investor:

“Many years ago, the company “Health and Racquet Club” (H&RC) listed on the JSE at 100c. After six months, the share had fallen to 60c and this intrigued me. I approached the CEO of the company and suggested to him that either the share had been over-valued at the initial public offer (IPO) 6 months ago, or the market just did not understand what he was doing. He said that he thought the company was worth 200c – twice the price that it had listed for and he explained why.

I then visited 8 different H&RCs. I spoke to the management; I spoke to the staff and I spoke to the customers. When I was done, I came to the conclusion that the CEO was right – the business was an absolute cash-cow. So, I bought a large parcel of the shares at 60c and waited for the market to come to the same conclusion and bid the share up. After a while that is exactly what happened. 18 months later the share was trading for 240c and I had made a tidy 300% profit on my investment.

Then, one day, I was reading my newspaper and I read that H&RC was buying Crawford College. This did not make any sense to me because Crawford was in the education business, but I had made a good profit out of the shares, so I continued to hold them. Then a few months later, I read that H&RC was buying Foodcorp – which was in the business of making various foods, including hamburger patties. Now I was trying to picture the student coming out of Crawford College, eating a hamburger and on his way to the Health and Racquet Club – and it wasn’t working for me. The company had clearly become de-focused so I sold my shares.

The shares continued to go up for a while, but finally collapsed. Eventually, they were rescued by the British company, Virgin - and became Virgin Active.”

You can see from this story the extreme importance of being focused in business. The education business is a complex business and it takes many years to learn exactly how it works. The food business is equally complicated. If a company starts to buy businesses in which it has no existing expertise, and where there is no conceivable synergy or economies with its existing businesses, then as a potential shareholder you have to question their reasoning.

Another current example of this is the Clicks ownership of Musica. Musica sells music CDs and music equipment like headphones. It is very difficult to see the connection between this and their business of pharmaceuticals, health and beauty products. Consider the Clicks chart:

This shows the Clicks share price going back to 2010 – and, as you can see it is a “diagonal” (a share which goes from the bottom left-hand corner of your screen to the top right-hand corner) – but none of this superb performance is because of Musica. This growth has occurred despite Musica which is miniscule in the Clicks group – so it remains a great mystery why the board of Clicks hangs onto this small, non-core business which is in a dying industry.

As the great management consultant Phillip Kotler famously said, the most important question a company can ask itself is “What business are we in?” – and then, by subtraction, “What business are we not in?”

It is always very tempting, if you have a successful business, to think that you could be successful in other businesses. But every business is complicated and your ability to run it successfully depends on years of accumulated experience and wisdom about the industry that it is in. So, the only justification for an acquisition must be that it is a good fit with your existing business. If it is not, then it should be considered non-core and sold.  

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES

Bubble

Last Friday the S&P500 reached another new all-time record high, closing at 6791 and reaching a new intra-day record high of 6807. This is obviously an exciting time for private investors, but with each new record high the systematic risk of a bear trend or crash increases. Consider the chart:

The PEG Ratio

Since the government of national unity (GNU) came into power in June 2024, there has been a definite improvement in the South African economy. Perhaps the improvement is not as dramatic as some people were expecting, but the progress cannot be denied.

Possibly the best indicator of that is the 28% rise in the JSE Banking index which, before the GNU had

Rare Earth Elements

Investors worldwide had been of the opinion that Trump’s ability to impact markets was on the decline. His erratic, on-again, off again tariff policies had either disappeared or had been mostly discounted into share prices. His attack on the second largest economy in the world, China, seemed to have been largely resolved, and a meeting with

US Shutdown

There has been much in the media recently about the US government shutdown and the fear among investors that it might begin to affect the stock market, depending on how long it lasts.

A shutdown occurs when the US government reaches its budget limit and requires a bill to be passed through both Houses to extend the government’s spending limits.

New Listings

Two new companies, ASP Isotopes and Greencoat Renewables, have recently come to the JSE. Both are developing companies that have recently made losses and have been funding those losses by raising capital and selling assets. They both have substantial “blue sky” potential but also carry substantial investment risk. This is probably truer of ASP

Exponential Growth

The  S&P 500 index is important because all the stock markets around the world tend to follow it. If the S&P is in a bull trend then London, Tokyo and the JSE will also be in a bull trend – and vice versa.

The S&P500 index began 68 years ago on 4 th March 1957 with an initial value of 43,73. It took nearly

The US Jobs Market

International investors who trade on Wall Street are generally negative about any good news from the economy because it tends to make the monetary policy committee (MPC) more hawkish and less likely to reduce interest rates. The opposite is also true. But there comes a point where bad news is so bad that investors begin to fear that the US economy is heading

Jackson Hole

Once a year in late August central bankers and academics congregate in Jackson Hole to discuss the state of the economy and consider the way forward. Traditionally, the Chair of the Federal Reserve Bank (“the Fed”) addresses the meeting and gives direction to its thinking on monetary policy in the US. This year, the comments of Jerome Powell resulted in the

Choppies

Choppies is a supermarket chain which operates in Botswana, Namibia and Zambia. It is listed both on the Johannesburg Stock Exchange (JSE) and on the Botswana Stock Exchange (BSE). Notably, the company has resisted the temptation to re-enter the highly competitive and cut-throat retail market in South Africa, having exited that market in 2020 due to sustained losses. Despite

Gold Resistance

All investments throughout the world can be ranked on a scale from high risk to low risk. As a general rule, in the world of investment, risk and return rise together. In other words, as the risks in an investment increase, so does the return necessary to attract investors.

At the one end of the scale there are very low risk investments