Some of the biggest growth shares on the JSE lie in investment holding companies

If there’s one type of company that’s cheap, and heavily discounted right now – it’s investment holdings companies.  For example, Hosken Consolidated Investments (HCI) trades at a 23% discount to its REAL value. Then there’s Sabcap – its share price trades at a 28% discount to its REAL value.

And the list goes on… Trematon, EPE Capital, Brait.

So, today I’m going to explain the ins and out of investment holding companies, and if they should play a role in your portfolio?

What exactly is an investment holding company?

Think Warren Buffett’s Berkshire Hathaway…Which is arguably the most famous investment holding company in the world today.

Or what about JSE-listed Remgro, which is majority owned by the Rupert family.

An investment holding company is a company that owns shares or makes investments in other companies. These companies can be listed on a stock exchange or unlisted. The latter is beneficial as holding companies get to invest in opportunities that retail investors cannot invest in on their own.

For example, as of 30 December 2023, Remgro owns shares in JSE-listed companies like RCL Foods, eMedia, Discovery, Firstrand and more. While they own stakes in unlisted companies like Seacom, CIVH (fibre infrastructure), and more.

Now, investment holding companies don’t operate the companies it fully or partially owns. Instead, because of their large shareholding, it typically has their own directors on the board. This way, it can still influence the business’s strategy and direction.

And, because they make sizeable investments, investment holding companies usually get to buy into other companies at great prices.

The one downside is these companies mainly generate cashflow from dividends paid by its investments. That means, for them to boost growth, they either have to…

• Issue more shares

• Realise gains on one of its investments by selling some shares, and then use the cash proceeds to buy into the next investment.

The key question is…

Why do so many investment holding companies trade at huge discounts?

To answer, let’s go back to what I mentioned earlier…

If an investment holdings company wants to raise cash it needs to either sell shares or sell an investment and bank the profits it made from the growth.

In bull markets, this typically isn’t a problem. But in bear markets, it becomes difficult to sell large chunks of an investment. After all, during market downturns, not many businesses can afford to fork out R100 million, R500 million or a R1 billion.

The result?

Investors typically discount the shares in holding companies to make up for the liquidity risk.

Sure a 10%, 20% even 30% discount makes sense in certain circumstances. However, in extreme cases, you could buy shares in an investment holding company at a 50%, 60% even 70% discount to its real value.

In my view, this is where the profit opportunities lie…

Because when a bear market eventually turns into a bull market, these shares typically move higher erasing the discount to their underlying value. Even better, some investment holding companies end up selling at a premium to their underlying investments.

How do you find the REAL value of an investment holding company?

The best way is the net asset value (NAV). Usually, you can find this number in the company’s annual financial statements. It is the book value of all the company’s assets, minus all its liabilities. Take this number and divide it by the total number of outstanding shares and you’ll get the company’s net asset value on a per share basis. You can then compare its current share price with the NAV per share.

For example, in the latest issue of Red Hot Penny Shares, I recommended buying a small cap investment holding company whose shares were trading at 178c. Meanwhile, the value of its assets ALONE were worth at least R3.29. That’s nearly a 50% discount!

The kicker? This small cap grew its operating profit by 135% and earnings by 99% for the year!

So, you could buy an insanely profitable company at a HUGE bargain.

PS. Remember this is what we do at Red Hot Penny Shares, we look for bargain stocks with massive growth potential. We’ve been publishing this service for 24 years so I think our track record for finding the best small cap growth shares speaks for itself. Join our Red Hot Penny Shares community and watch your portfolio grow.