Out of Whack in Africa

“The nice thing about telling the truth,” Andy Jacobs, a remarkable member of Congress, said to me one day, “is that you don’t have to remember what you said.”

That is the beauty of principles – they save you a lot of difficult, and ultimately futile, thinking. “Who shall I murder today? ” Honestly, the thought never troubles my mind. I don’t have to worry about who should live and who should die. The world would certainly be a better place if some of its inhabitants could be hastened along on their road to hell. But which ones? Fortunately, it’s not my problem.

Passing a beauty on Charles Street. Her arms swinging freely…the wind pressing her dress against her legs – oh, I can almost smell her perfume. How nice it might be… But the thought is quickly put out of my mind. It is out of the question; against the rules. Thank God. I don’t have to worry about it…or the consequences.

You may wonder, dear reader, what this could have to do with investments. When I left you yesterday, we were talking about Africa. I had put forward the very modest idea that all it would take would be a little bit of light…and investments in the Dark Continent would do well.

Will the light of progress shine on Zambia, Gabon, Morocco, Kenya, Mozambique and the other countries that blight the African continent? Honestly, I don’t know. But there are principles you can follow to guide your investments that will save you a lot of hopeless thinking about it.

Buy low, sell high.

Investments in Africa are now very cheap. The world’s investors think they are “hopeless,” – that Africa will always be as lawless and profitless as it appears in today’s popular press.

But this is a trend whose premise is probably false. Africa was not always a hellhole. And, despite the media’s portrayal…there are places in Africa today that are stable, peaceful and profitable.

We need not imagine that governments in Africa will begin to resemble Switzerland in their probity…nor that economies will hum to the laissez faire tune of Hong Kong. All they have to do is to function a little less pathetically than they have for the last half-century.

Even that, however, is not guaranteed.

With no crystal ball, no telltale entrails and no trustworthy analysts upon whom we can rely, we are forced to follow principles. We buy what is cheap. And what is cheap? I will answer the question myself – it is what no one wants to buy.

Few people have wanted to invest money in Africa over the last few decades. As a result, there is little competition and asset prices are very low. For this reason alone, profit margins are the fattest in the world. Though Miles Morland, whom I introduced yesterday, concedes that the figures are hardly perfect, the average operating profit margin in the brewing industry, for example, in Africa is over 20%. It is barely 10% in Asia and only 14.9% among developed nations of the OECD.

In the retail sector, operating profit margins are only 2.2% in Asia, 4.2% in North America, 5.3% in Europe and 8.9% in Africa.

But it is in the banking sector that Africa really shines.

“Most multinational banks,” writes Morland, “mindful of the cliche view of Africa, avoid the continent. This creates a highly profitable environment for the efficient participants who are prepared to do business there.”

The return on equity in the banking sector in North America averages 11.8%. In Africa, it is 25%. Want to buy an African bank?Barclays Zimbabwe shares sell for 11 times earnings. The United Bank of Africa, a Nigerian bank, sells for 6 times earnings. Standard Chartered of Ghana can be bought at a P/E of less than 4. And the SSB bank of Ghana is now available at 2 times earnings and 0.9 times book value. SSB bank – with return on equity of 37% and return on assets of nearly 6% – may give an investor more bang for his buck than any bank in the world.

Nature abhors a vacuum. I do not know why nature takes this view, but she does. That is an observation that leads to a principle: Don’t put your money in a vacuum – because it is not likely to persist.Just as you may presume that things that are out of whack will eventually regress to the mean…so might you assume that nothingness will eventually be filled with somethingness.

There is plenty of nothing in Africa waiting to be filled in. There are, for example, 514 “fixed telephone lines” per 1,000 peoplein Western Europe. In the Ivory Coast, there are 12. In Europe, nearly one out of every four people has a PC. In Ghana, it is one out of 1,000.

Adrian Day tells the story of his arrival to America in the 1970s.He rode to the local telephone office on his bicycle to ask tohave them install a phone. Based on his experience in England,he expected to wait several months for the installation. Yet, by the time he arrived back at his apartment, a telephone truck was already parked in the driveway waiting for him.

Today, telephones in Europe are installed about as quickly as they are in America. But in Nigeria, the waiting period for a new phone is 10 years.

As a result, new mobile phone companies are growing rapidly and profitably. “A CSFB report,” says Morland, “forecasts that African mobile subscribers will expand from 14.7 million to 56.4 million by 2004, a compound growth rate of 27.8% a year, to make Africa the fastest growing mobile phone continent in the world…operators generate much higher margins than developed world companies and customer acquisition costs are significantly lower.”

“The result,” adds Morland, “is that MSI, for instance, rolled out its service in Brazzaville, Congo, in January [of last year] and was profitable six months later, an unheard of achievement in the first world.”

“Orascom Telecom,” Morland concludes, “trades on the Cairo Stock Exchange… at a EV/EBITDA multiple of around 4.”

Morland, by the way, operates a fund that, he says, has an average P/E of 5.3 and an average cash dividend yield of 9.4%. Adventuresome investors can reach him by e-mail at jgm@blakman.com.

Your correspondent…

Bill Bonner
February 1, 2001

P.S. You may have noticed that one of the very cheap stock selections of which I was so proud made the news yesterday. W.R. Grace is apparently looking carefully at chapters 7 and 11 of the bankruptcy code – seeking shelter from its many creditors. There is no law, or principle, that says a stock that is dirt cheap – as GRA was when I bought it – cannot become, say, contaminated landfill cheap…and that things that are out of whack cannot become even more out of whack.

*** The Fed had to cut rates yesterday. And the market almost had to drop. The rate cut was expected and already priced into stocks.

*** Still, the Dow managed a 6-point increase… while the Nasdaq felt disappointed, falling 64 points. So, if the Fed’s “rapid, forceful response of monetary policy” can’t lift the Nasdaq, what can?

*** GE fell back 1%. Gold mining companies rose 1%…and the dollar slipped, with the euro again over 93 cents.

*** The market reacted badly to news from Amazon, Applied Materials and other big techs and Nets. Adobe, for example, fell 17%. Amazon fell 10%.

*** Amazon lost $4 per share last year…giving it a negative P/E of nearly 4! The company loses 25 cents for every dollar of share price.

*** 60 Minutes did a segment showing how Wall Street analysts betrayed investors. Amazon was Merrill Lynch’s client. Back when the shares were trading at $275, Amazon’s analyst at the time grew pessimistic on the stock. So they replaced him with Henry Blodgett, after Blodgett said the stock would go to $400.

*** “They really are cheerleaders,” said former analyst Tom Brown, who was fired from DLJ for being too negative. As an internal memo from Morgan Stanley put it: “We do not make negative comments about our clients.”

*** Never was heard a discouraging word from Mary Meeker, the Queen of the Net, and Morgan Stanley’s Internet analyst. She was bullish on Morgan Stanley’s client, Priceline.com, at $134…and remained positive all the way down to $3.

*** Blodgett cheered Amazon down to its present price – about $17 – giving Wall Street a new verb: to ‘blodgett’ a stock…

*** The cat is out of the bag, of course. Everyone now knows that analysts cannot be trusted. And the techs and Nets have fallen in price. But many of the Big Techs are still far too expensive. At $39, Nortel still sells for a P/E of 41. At $37, Cisco has a P/E of 43. And PMC-Sierra, now $72, has a P/E of 81. With slowing growth and falling profits…what could justify those prices?

*** The market’s breadth continues to be impressive – 1,763 stocks advanced yesterday; 1,377 declined…256 hit new highs; only three hit new lows. Is this a ‘stealth bull market?’ More likely…it’s the correction of the “stealth bear market’ that began in April ’98. So many stocks fell so much – the bear is taking a breather to let them recover.

*** GDP grew at 1.4% in the fourth quarter – its slowest pace since ’95. And consumer confidence plunged.

*** But consumption spending increased 2.9%. New home sales increased 13.4% in December, their biggest jump in eight years. And mortgage-refinancing applications are coming in at 4 times the rate of a year ago.

*** The economy is slowing down. People are getting laid off. Confidence is falling. But still people are borrowing and spending. Go figure.

*** Luxury retailers – Neiman Marcus, Bloomingdale’s, Tiffany’s – report weak sales. “The dot-com bourgeoisie will be out of the retail mix,” comments the director of Trends Research Institute, “along with the class of paper-rich investors.”

*** The Financial Times reports that mutual fund assets fell for the first time in more than a decade last year – despite a record inflow of cash. The new money could not offset the effect of the Nasdaq’s collapse.

*** Investor’s Intelligence reports that newsletter writers have become even more optimistic – with 61% now in the bullish camp. The last time there were this many bulls was April 2000.

*** “A lot of conventional wisdom these days comes from the 16-year long bull market,” writes value investor Lynn Carpenter, “a historical anomaly that may never happen again in our lifetimes. But for most investors – and that includes the under-40 professionals – this bull market is their total reality. So here’s something to keep in mind during what appears to be a bear market rally. In a rampant bull market, a stock that bucks the rising trend by falling 25% may well have problems. But in a bear market, falling prices often represent investor nervousness, not hard-headed vision. We’re likely to see a lot more nervousness, very soon. When stocks start heading south again, you’ll do better sticking by your beliefs and avoiding the crowd. Buy good companies – cheap…”

*** “It has nothing to do with Denise Rich’s hundred visits to the White House,” said Dick Morris on Fox News Channel. Clinton pardoned Marc Rich because of “one thing and one thing only, what Jack Quinn knows.” Jack Quinn was counsel to the vice president…Then he became counsel to the president. And as counsel to the president,he was the one who decided what documents to give Alfonse D’Amato and all the other congressional investigators for a year and a half…

“And Jack Quinn knows everything… And when you know a lot and you come to Bill Clinton and you ask for a favor, you get it…” Poor Michael Milken. If only he had paid Jack Quinn millions of dollars to represent him!