Optimal share selection : a study of the South African construction industry

Abstract

Investment selection difficulties for novice or inexperienced investors has long been a hurdle for investors, the main concern being that invested capital may be lost due to poor investment decisions. The identification of a good quality share that has its origins in companies that are profitable and sustainable can become a maze of numbers and data that does not add value to the investor and does not answer the fundamental question of whether to invest or seek alternative investment opportunities. This research study attempted to uncover financial multiples and or variables that will be indicative of share price fluctuations in the construction industry and to construct a framework that investors can use in assisting to make investments decisions. Furthermore, a share portfolio using this framework was constructed by applying the framework developed. The approach of the research study was to firstly conduct a literature review on the construction industry, share selection theory and financial multiples and variables. This was done in context of the South African construction industry locally and abroad. Following this a sample population of companies listed on the Johannesburg Stock Exchange that are categorised under the construction segment was chosen for research purposes. The financial data from these companies was gathered and multiple linear regression analysis used to analyse data and develop regression equations. Out of these equations the most prominent variables were identified. Following identification, these variables were presented in a framework that was indicative of the construction industries share price volatility. Finally, a share portfolio of construction companies was constructed. The portfolios objective was to have an adequate balance between the volatility of the portfolio and the level / rate of returns that it could earn. Although the construction industry in South Africa is severely under pressure with high levels of competition the framework and the portfolio constructed did demonstrate that the new potential and existing investors could enjoy adequate returns on investment in the construction industry in South Africa