Piet Viljoen’s top three stock picks 

At a recent JSE stock picking event, Piet Viljoen, a portfolio manager and executive director at Merchant West Investments, said three JSE-listed companies stand out as great investments – Argent, Adcorp and Merafe.

Known for his strong equity fund performance, Viljoen is an award-winning portfolio manager, recognised with a 2023 Raging Bull Award for Best South African General Equity Fund on a five-year risk-adjusted basis. 

He also earned the Raging Bull Award in 2022 for the Best South African Equity General Fund.

Previously, he outlined three main criteria for selecting investments: 

• 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 cash flow 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, adding that a company with a P/E of 5 offers a 20% earnings yield. 

Even without growth, this yields 20%, and with buybacks, the return can be even greater.

“At the moment, in the South African market, you have a very interesting confluence of events. The one is that South Africans have basically taken all the money invested offshore and withdrawn it from the local market.” 

“There’s been massive force selling of local stocks, especially smaller midcap stocks which aren’t in indices and which the large fund manager can’t buy.”

“So, their share prices are depressed, not because they’re bad companies but because there has been forced selling.”

Viljoen said that, as a result, companies in the small and midcap sectors have very low share prices. 

“On top of that, the companies that are still around today that have survived the past 10 years of this economy, which has been going nowhere, are good companies with good management.”

“By and large, that is how they’ve been able to survive. So you have this confluence of events where you can buy good companies at low prices – and that doesn’t come around very often.”

Viljoen highlighted three companies that fall into this category of good companies at low prices: Argent and Calgro M3.

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Argent

Piet Viljoen’s first stock pick is Argent, a company with a market cap of R1.47 billion. 

This company has traditionally been seen as a “steel basher,” known for manufacturing products like the Expanda range of security systems and American shutters. 

However, Viljoen said that Argent’s operations go beyond what most people perceive. 

Over the past decade, the company has been strategically restructuring its portfolio by selling off lower-return businesses and reinvesting that capital into higher-return sectors. 

This approach has resulted in an impressive increase in its return on equity (ROE) from 6% – typical of a low-margin industrial company – to around 16% and growing.

This transformation began six years ago when a very astute investor acquired a significant stake and took a leading role in refining the company’s capital allocation strategies. 

Argent now operates as a well-managed, high-return business that consistently generates value, largely independent of economic cycles. 

According to Viljoen, Argent’s valuation remains very attractive, with a price-to-earnings (P/E) ratio of around six and trading at below book value – meaning investors pay less than the equity value for a company delivering over 16% returns.

According to Viljoen, this self-sustained business model, guided by strong management and effective capital allocation, is a “bargain.” 

While external factors like economic growth or interest rate cuts would be a bonus, they are not essential for Argent’s success. 

The company’s disciplined internal strategy provides the core foundation for growth and investor returns, making it an appealing long-term investment choice.

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Adcorp

Piet Viljoen’s second stock pick is Adcorp, a staffing and employment agency with a market cap of R549.41 million. 

This company has undergone extensive restructuring over the past decade. 

Previously, management expanded too quickly, and labour legislation changed a lot. Because of this, they have been forced to change the way they do business. 

While it has taken them a long time to adapt to the current environment, these changes are now paying off. 

The recent annual results suggest that the company has reached the final stages of these adjustments. 

Currently, Adcorp’s earnings, when adjusted for these recent changes, show that the stock is trading at a low price-to-earnings (P/E) ratio of approximately four. 

Additionally, the company has a notably strong balance sheet with R280 million in net cash, representing more than half of its R549 million market capitalisation. 

This substantial cash reserve means that investors effectively pay very little for Adcorp’s core business, placing its “effective P/E” closer to two.

Viljoen said that these metrics are highly appealing, noting that such a low valuation allows investors to benefit regardless of external economic conditions. 

“It doesn’t need lower interest rates, it doesn’t need a strong economy, it doesn’t need any help from outside. The price is so low that you will do well regardless of the environment.” 

If the economy grows, Adcorp, as a staffing business, will perform even better. 

Adcorp trades at a third of its book value, offering a potentially high earnings yield of 50%, which Viljoen argues makes it a compelling long-term investment.

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Merafe

Viljoen’s third stock pick is Merafe, a joint venture partner with Glencore in the ferrochrome smelting business with a market cap of R3.6 billion. 

Though ferrochrome smelting may not sound exciting, Viljoen sees value in Merafe because the company has already completed its capital expenditure. 

This means that it can now focus solely on smelting chrome into ferrochrome, which is a key component in stainless steel production. 

Given South Africa’s significant chrome resources and the steady global demand for stainless steel, Merafe benefits from a strong long-term market position.

Merafe operates in a cyclical industry, and while current earnings are high, Viljoen expects them to normalise over time. 

Right now, the stock trades at a P/E ratio of around two, with a dividend yield of approximately 55%. 

Viljoen explained that if one averages Merafe’s earnings over the last decade, the P/E ratio is a more stable five, making it attractive from a long-term investment perspective.

“The kicker for me in Merafe is that it doesn’t suffer from the capital misallocation risk that most mining companies face where management tries to allocate capital towards new mines and new ventures to protect their jobs.”

In its joint venture, “Glencore holds the purse strings, Merafe just picks up the cash flow and pays dividends. That’s all it does.”

By focusing on stable dividends rather than expansion or diversification, Viljoen sees Merafe as a “bargain”, which provides solid returns at an attractive valuation through the commodity cycle.