What kind of stocks are beating the bear market? Defensive, value or growth? On the results so far, it is all three of these. Some shares in all of these categories are doing surprisingly well, considering that the JSE entered the worst bear market in many years after reaching a record high in late May last year.

It is 14 months since the JSE all share index (Alsi) reached its high and then started falling along with many other world equity markets. Picking winners now can be an artificial exercise as we do not know yet whether the bear market is over, but it is an interesting time to consider which stocks are so far beating the Alsi by a wide margin.

The comparisons are affected by the periods the performances are measured over. For much of the JSE, particularly the financial and industrial sectors, the bear market effectively started in August 2007. The Alsi's steep rise in the first half of 2008 was narrowly based, driven mainly by resources stocks.

Nonetheless, using 22 May last year as the start of the bear market gives interesting results. At its lowest point, on 21 November it was down by 46 percent and despite a strong rally since March, it remains 27 percent down on the high.

The big outperformers

More than half a dozen stocks have risen in this period by well over 30 percent. Their price gains in this time range from 33 percent for Absa to 83 percent for clothing retailer Mr Price and 84 percent for Aspen

Investors could have beaten the Alsi by holding only financial and industrial stocks, but the big outperformers have not necessarily been obvious choices as defensive counters. Some have done well because they were cheap and financial results were much better than expected.

"A lot of the retailers have surprised dramatically to the upside at earnings level,' says Melville Douglas chief investment officer Jerome O'Regan

In the health-care sector, Aspen has grown quickly as an international company, and ranks as the largest manufacturer of generic pharmaceuticals in the southern hemisphere, with factories in India, East Africa and Latin America.

A strategic relationship it has had for some time with UK-based global giant GlaxoSmithKline (GSK) was extended with a series of deals announced in May.

A steep rise in Aspen's share price

Aspen expanded its product range significantly, acquired rights to distribute GSK products in SA and acquired a GSK factory in Germany. The deals are being funded by issuing shares worth R3.2-billion to GSK, which gains 16 percent in Aspen.

"The acquisition of additional products for distribution into worldwide markets supports Aspen's internationalisation strategy into emerging markets and establishment of a global distribution network,' says CE Stephen Saad.

The deals underpinned a steep rise in Aspen's share price, which has gone up by 70 percent since the beginning of this year, its p:e rating increasing to 18.5. Aspen is now being viewed similarly to companies such as MTN and Naspers, which are becoming prominent growth stocks in emerging markets.

Aspen looks fully priced relative to the market, but the rating indicates investors are expecting more strong growth.

Naspers has also been trading at record highs in recent weeks, though its price rise since May last year is more modest, at about 30 percent. The financial results have been good, but a big factor affecting this stock is the growth in value of its 35 percent stake in Tencent, a Hong Kong-listed Internet company in China.

Naspers remains attractive

On its p:e of 28, Naspers looks expensive, but some investors believe it remains attractive because of its resilient cash flow and the potential value of its investments in emerging markets.

Food and drug retailers are traditionally regarded as defensive stocks because their earnings tend to be resilient in a downturn.

The big stocks in this sector have risen strongly since May last year, though Shoprite, which benefited from its positioning in the low-income sector and the performance of its supermarket stores in Africa, has outpaced Pick n Pay and Spar

Shoprite's price is up by almost 90 percent since August 2007 and 41 percent since the Alsi peaked last year. It trades at a large premium to the Alsi but in the short term this may be justified by earnings prospects. At Shoprite's 2009 interims, CE Whitey Basson said the group was 'better placed than most' to weather the storm and achieve satisfactory results for the year to June.

The strength of bank shares

Clothing retailers, which are more cyclical, also show strong gains. These stocks started falling steeply in the second quarter of 2007 and remain below their record highs, but since May last year Mr Price has risen 83 percent, Foschini is up 58 percent and Truworths rose 51 percent.

Several factors explain these performances. In the middle of last year their p:e ratings had fallen to between 5 and 7, indicating outstanding value; balance sheets have remained strong; and sales held up well. After rate cuts, investors are buying consumer cyclicals — companies exposed to markets that may rise or contract sharply during economic cycles.

For similar reasons, the credit-based furniture and appliance retailer Lewis is up 56 percent since May last year.

Another striking trend among recent outperformers is the strength of bank shares, which should also benefit from lower rates. All fell to historically low p:e ratings early this year. Absa, the banking group that's most closely linked to the local consumer sector, is up 34 percent since May last year. Capitec, the microlender, gained 56 percent in this period.

Outperformers due for retreats

After recent strong gains, many of the outperformers may be due for consolidation — or some retreats. The deep discounts in share ratings relative to the market have narrowed or closed. The big question now is the timing of an earnings recovery. Financial results in the second half of this year will give clearer signals on whether more share reratings are justified, among consumer stocks or in other sectors.

The unusually low ratings now appear in areas such as building and construction. Consumer-based stocks still offer grounds for confidence and there are early signs that conditions are starting to normalise, indicating a normal economic cycle, says O'Regan.

For investors considering increasing exposure to equities, the more defensive stocks, such as companies that have food, drink, health-care and tobacco assets, offer lower risk. In choosing these, share ratings as well as earnings prospects have to be considered.

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