Piet Viljoen picks two JSE stocks with big growth potential

Piet Viljoen, a portfolio manager and executive director at Merchant West Investments, said two JSE-listed companies stand out as great investments – Argent Industrial and Calgro M3.

Viljoen is an award-winning portfolio manager who has achieved exceptional performance with his equity funds.

He won a 2023 Raging Bull Award for the Best South African General Equity Fund on a risk-adjusted basis over 5 years.

He also won a Raging Bull award for the Best South African Equity General Fund in 2022.

Viljoen shared his stock-picking advice with delegates at the 2024 BizNews Conference, which was held in Hermanus in March.

He revealed that he looks for three main characteristics when picking companies to invest in –

  • The company has to be small. This means the market often ignores them, or there is forced selling.
  • It needs to be a good business. The company needs to generate good earnings and have solid fundamentals.
  • There is a management team that is good at capital allocation. They must use free cashflow to buy back shares.

“If you put these three things together, you can build a wonderful portfolio of value stocks which can outperform the market,” he said.

“If you can buy a good company at a starting price-to-earnings (P/E) ratio of 5, your earnings yield is 20%.”

“If such a company only maintains what it has been doing without any growth, you will earn 20%.”

However, if the company also used its cash flow to buy back its shares, you can get an even higher return.

Viljoen highlighted two companies that fall into this category and offer good value without significant risk: Argent Industrial and Calgro M3.

Argent Industrial

The Argent Group has been listed on the Johannesburg Stock Exchange (JSE) for 20 years.

It is predominantly a steel merchant, with steel trading making up approximately 43% of group turnover.

37% of the group comprises companies that benefit or add value to steel via manufacturing or steel service centres.

Argent’s shares in issue over the last five years declined by 33%. “They bought back a third of their shares over the last five years,” he said.

Five years ago, earnings per share (EPS) was R1. Today, it is R5 per share. “They grow their EPS faster than Microsoft,” he said.

The shares are trading at around R18 per share, which means the company has a P/E ratio of just over 3. This makes it very cheap.

The chart below shows Argent’s share price over the last year.

Calgro M3

Calgro M3 is a property and property investment company specialising in integrated residential developments and the development and management of memorial parks.

Calgro M3 bought back 25% of its shares over the last five years. Its EPS increased from 15c per share four years ago to R1.84 today.

The share is trading at around R5, which means it has a price-to-earnings ratio of below 3 times.

The chart below shows Calgro M3’s share price over the last year.