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You need to avoid these to shares in July

by , 08 July 2020
You need to avoid these to shares in July
The economy is opening up again following lockdown.

Restaurants and hotels are opening their doors again, so it might sound like a good idea to take a bet on these companies share prices recovering quickly now…

But before you do that, just give me a moment to explain why these sectors, and specifically two stocks in these sectors aren't headed for a recovery yet.

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Covid-19 is about to peak – fear could cause another
market correction
 
You need to remember that Covid-19 is about to peak in South Africa. That means for the next couple of weeks we’ll see a rapid increase in infection numbers, and possibly a rapid increase in deaths.
 
While I am in no way part of the doom and gloom crowd, I believe hitting this peak in the next month will cause a lot of fear and panic.
 
A lot of people excited about the economy reopening will go back into hiding.
 
And restaurants, hotels and casinos certainly won’t see a boom in business.
 
We may want to be done with the virus, but it is increasingly evident it is not done with us.
 
As is the case with everything in South Africa today, there is some disagreement about why the virus spread has accelerated. Some say it's simply a function of more tests.
  
Others blame the opening of churches and restaurants. The lack of people wearing facemasks and practising social distancing also have a place on the blame spectrum.
 
Whatever the cause, the virus is spreading at around 10,000 new cases per day, and South Africa is now among the countries with the highest new cases per capita in the world.
 
We don’t know how this plays out in the long run. I can make guesses based on estimates by actuaries, doctors and professors, as well as observations. But they are likely to be wrong.
 
What we do know is in the next three weeks cases are going to continue stacking up.
Hospitals are going to fill up, and fear will reach a peak.
 
The stock market lows in March and April this year served, on the back of fear and uncertainty, acted as an incredible buying opportunity since stocks have rallied 40% higher since then. But don’t let the fact many stocks are still dirt cheap fool you. Some stocks still need to be avoided like the plague.
  
Two companies you need to avoid right now
 
Restaurants are going to take another hit I'm afraid. When the cost of dining out includes being exposed to a virus that has no cure, and if spread to older relatives could cause death, people are going to think twice before heading out for an expensive dinner. What’s more – most people tend to enjoy a glass of wine or beer with dinner. And right now, you can’t do either. It also so happens that the highest profit margins for restaurants lie with liquor sales…
 
Spur Corporation (JSE:SUR) is a great company. It’s paid good dividends in the past, and has been resilient through past recessions.
 
But the family restaurant chain is in trouble. Right now, Spur has actually opted not to even open up many of its Spur franchises. The reason being without alcohol sales accompanying meals, and the muted number of people dining out, the group won’t make money.
 
What’s more, in the meantime it has to help its franchisees avoid bankruptcy and continue paying overheads.
 
In May, 155 of the 520 restaurants across the group in South Africa had reopened to offer delivery-only services. That’s an abysmal 29% of restaurants open – and most won’t be trading at normal revenue levels.
 
From observations it seems most restaurants especially in the sit-down market still haven’t reopened. The breakdown of restaurants trading in May across the brands is as follows:
 
 
 
 
Spur shares are 38% below their January 2020 highs.
 
I wouldn’t buy just yet. The company’s results are due in September for the financial period ending June 2020.
 
I believe an imminent trading statement will show us more weakness in the share price…
 
 
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Hotels and Casinos are also on my ‘avoid’ list
 
Sun International (JSE: SUI) the owner of many of SA’s top hotels and casinos is down 58% from its January 2020 levels.
 
This might look like a very attractive level to buy shares in the company.
 
But if you check the company’s business update on 24 June 2020, you’ll see ALL of its South African, Chilean, and other international operations have been closed since March 2020.
 
Some of its operations are now reopening.
 
But what’s the use of Sun City being open when people from Gauteng technically may not cross provincial boundaries to visit? Most of its visitors were overseas tourists anyway.
 
Similarly, the Wild Coast Sun is a predominantly tourist driven operation. And revenues for these will remain rock-bottom for the foreseeable future.
 
The company is attempting to open business within regulations. But again – this will be trading without alcohol, within limited hours and with limited customers on its floors.
 
Again, results for June 2020 interim period are due 2 September 2020. Between now and then operations won’t improve. And added fear might make things look bleaker in the short term.
 
I’d certainly avoid the shares for now… But a buying opportunity may be on the horizon as fear peaks.
       
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares 
 
P.S. If you want to know what you should be buying, take a look at my latest issue of Red Hot Penny Shares out now.  I’m offering a super discounted subscription, if you sign up today…


You need to avoid these to shares in July
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