Are investors still sweet on sugar stocks?

South Africa's small and medium cap sector has been a beacon of opportunity amidst the challenges facing the larger stocks in the market. Anthony Clark, an independent analyst at Small Talk Daily Research, shed light on the key trends and hidden gems within this sector during a recent interview with CNBC Africa. The conversation explored the potential for value creation and the emergence of special situations that have caught the market by surprise. With a focus on unlocking value and identifying overlooked opportunities, Clark provided insights into where investors could find promising returns in the second and third quarters of 2022. Clark began by addressing the historical challenges faced by sugar stocks in South Africa due to factors such as the sugar tax and international surplus. Companies like Tom Gott had their own setbacks, including accounting scandals and looming rights issues. The sector was deemed less favorable for investment, given the persistent underlying problems. Clark emphasized the importance of evaluating whether existing shareholders would be willing to inject additional capital into companies that had struggled to sustain their performance. Shifting the discussion to the small-to-mid cap sector, Clark highlighted the positive start to the year despite broader market conditions. Small cap stocks were up 3.9% and mid cap stocks up 3%, outperforming the overall market. He pointed out the success of family-run companies that surprised the market with strong earnings, signaling potential value for investors. Clark mentioned examples like Combined Motor Holdings and a tech company in Johannesburg that had delivered exceptional results. Unbundling emerged as a notable trend within the sector, with companies like PSG and ZEDA taking strategic actions to unlock value for shareholders. Corporate activities such as buybacks and asset sales led to significant share price movements, showcasing the impact of value creation catalysts. Clark highlighted the importance of these actions in narrowing discounts to net asset values and attracting investor interest. Regarding investment holding structures, Clark expressed a shift in investor preferences towards direct asset ownership and transparency in capital allocation decisions. He discussed the historical context of conglomerate structures and emphasized the need for companies to create value by unlocking hidden assets. Activism from institutional investors was expected to drive further value unlock and push companies to address wide discounts. Looking ahead, Clark identified the agriculture sector as a promising area for investment, with companies like Cop, Agri, TWK, Omnia, and Sanfurs poised for continued growth. The surge in soft commodity prices indicated strong demand and inflationary pressures, benefiting farmers and related businesses. Clark advised investors to focus on overlooked companies with strong fundamentals and potential for corporate activity. In conclusion, Clark highlighted the importance of thorough research and selectivity in navigating the small and medium cap sector. With a keen eye for special situations and undervalued stocks, investors could uncover hidden gems and capitalize on the opportunities presented by a dynamic market landscape. As the year progresses, the focus on unlocking value and identifying growth prospects will be key to success in the evolving market environment.