A value–based investment selection framework for platinum shares on the JSE (Ltd)

Abstract

Fundamentally at the root of financing is the core principle that investors expect compensation for the risk taken, since investing in equity embodies an opportunity cost. The Platinum Sector of the Johannesburg Stock Exchange (JSE) is notorious for its volatility, but seems to be very attractive to the investor due to increasing demand for platinum. The JSE is also an emerging market, with potentially stronger growth potential. The aim of the study is to develop a selection framework based on a limited number of key identified indicators, to incrementally reduce the risk of selecting poor performing assets/shares from the Platinum Sector, with anticipated higher rates of return. Eight variables were selected to develop a regression model, but only two variables, namely: Margin of Safety and Intrinsic Value were incorporated in the final regression model. Only four of the twenty years studied revealed a 10% level of significance. It was therefore concluded that no overall reliable selection framework could be developed for the Platinum Sector of the JSE. Individual companies were therefore tested against the regression model, with periods of good fit, but no persistent fit. Aquarius Platinum was the single company to demonstrate a reliable overall fit. Stand–alone risk of each company was hence evaluated against the average Johannesburg Stock Exchange All Share Index. By using the Security Market Line, investment potential in individual companies was identified.