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Will everything go back to normal - or is Curro's crash a sign to watch out for?

by , 21 September 2017
Will everything go back to normal - or is Curro's crash a sign to watch out for?
Curro's high was set in 2016, at R57.80.

For the first half of the year it's sat at around R48.

But, in the last six months the share is down 22.88%.

In the last month alone, it is down 16.44%.

So, does this mean that Curro is a perfect buying opportunity, or does it mean that the share is headed for even further downside?

 
Why the mainstream is saying you should buy more Curro shares
 
A recent report by Sharenet Analytics stated that:
 
Curro’s “price movement is currently -2.29 standard deviations from its 1,500 day linear trend line. We would expect COH’s price to correct towards its linear trend over the medium to long term with high probability. Based on this analysis, we assign a ‘Buy’ rating for COH.”


So what are they saying in this report?
 
Basically that: Based on a 1,500 day history of Curro’s share price it can be seen that the share went UP in a near straight line. And because it went up in a straight line, they expect it to continue going up in this straight line.
 
I can remember the last time people said things like “prices can only go up and won’t go down’ and ‘growth in these prices is a sure thing’.
 
That was just before the 2008 financial crash, and people were saying that ‘because property prices kept going up, they would continue going up’.
 
Sounds like a dangerous “analysis” to make if you ask me.
 
What I’ve got to say about Curro
 
First things first: I really like Curro. I think the business model is innovative, management is strong and the company has seen a massive opportunity in the market. Best of all it was a first mover.
 
But the fact is, that doesn’t make it a great buying opportunity. It just makes it a great business.
 
To know if it is a great buying opportunity we need to look at its price, the future growth and its competitors.
 
Curro – what the numbers say
Similiarly, you pay R68.27 for every one rand profit Curro makes, whilst you only pay R22.26 for every one rand profit Advtech generates.
 
So on all these counts, Advtech is vastly cheaper than Curro. In fact, Curro is valued in excess of 3 times more expensive than Advtech.
 
But perhaps the growth will make up for that?
 
So, let’s say Curro continues growing profits by 37% a year for the next three years, and Advtech grows profit at 17% a year for the same time.
 
At the end of the three years Advtech will be on a PE ratio of 13.90 with its current share price.
 
Curro will be at a PE ratio of 26.55 – which is still on the expensive side of historic valuations…
 
Now, let’s say that this Sharenet report is correct. Curro reverts back to the ‘mean’. So, it’s share price heads to around R45 in the next year.
 
Suddenly the three year PE shoots up to 32.6, from the calculated 26.
 
High PE’s mean High expectations
 
As I said, Curro is a quality business. But the fact remains, that when a share is on a high valuation as Curro is, the expectations are huge.
 
So, if the share even slightly underperforms the expected growth rate the market will punish it.
 
Let’s say Curro “only” manages 30% growth for the next three years (and Advtech manages 12% growth). In three years’ time Curro would be on a PE of 31, instead of 26.
 
Advtech would be on a PE of 16, instead of 13.90. So Advtech would still be below the JSE’s current average, whilst Curro would be more than twice as expensive.
 
At this same time Curro does not pay any dividend, whilst Advtech does.
 
Now, you could buy Curro at its lowest levels in a year and “mean reversion” could send the share price back to its “perpetual straight line growth”.
 
But how prudent is it to believe that things don’t change? That massive growth is possible for ‘ever’ without downside risks or dissappointments?
 
That’s why I would rather stick with the cheaper of these two competitors…
 
Here’s to unleashing real value
  
Francois Joubert
  
 


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