Posted by By OMODELE ADIGUN on
It was a rude shock for capital market analysts to see their predictions fall flat last month on the direction of share prices as the prices soared against all odds and literally hit the roof during the Yuletide season.
It was a rude shock for capital market analysts to see their predictions fall flat last month on the direction of share prices as the prices soared against all odds and literally hit the roof during the Yuletide season.
For instance, it is an agelong tradition and a view shared by a cross section of the market operators that share prices fall in December because of the desire of investors to realize money to fund the expenses of the festive season.However, the event of the last two months or so has put paid to such myth.
A few examples here would suffice to show that the stock market was not stagnant in a dynamic world of business. The share price of African Paints at the beginning of November was N1.52. But it shot up by 130 per cent to close the year at N3.49 per share. That of Guinea Insurance during the same period rose by 116 per cent, from N1.62 to N3.50.African Petroleum (AP) rose from N83.51 to N207, while Intercontinental Bank cruised from N27.20 to N40.60 per share.
Overall, the performance of the market in the outgone year was quite impressive.For instance, the performance indicators, the All-share index and market capitalization, recorded major growth during the year. The market capitalization grew by 141 per cent, from N4.23 trillion of January 2 ,2007 to N10.18 trillion by December 31.As for the index, it soared by 75 per cent, closing the year at a record high of 57,990.22 points from 33,189.30 points at which it opened for 2007.
Unlike 2006 when the stock market closed the year on a bearish note due to price losses of some highly capitalized stocks in the petroleum, marketing and banking sub-sectors, 2007 marked the dominance of the bulls till the last day.
Now that 2007 has come and gone,the question on the lips of most investors in the new year is where do I invest to reap handsome returns?
Investment experts, however, advise that investors should undertake comprehensive analysis of companies and consider their intrinsic values before making investment decisions in order to ensure they realize their objectives.
According to Mr Abubakar Lawal, the Managing Director of GTI Capital Limited, 'investors should consider the company's operations, sector of operations and the macro economy in forming decision to invest in any company."
Lawal said investors must develop adequate knowledge of financial information in reports of companies and understand the way to interpret these for investment purpose.
According to him, the first thing to consider is the company itself, its operations and the sector of the economy in which the company operates. After that, you consider the historical background of it, the ownership structure and the management.
He outlined that in arriving at investment decision, investors should focus on profitability, liquidity, stability and growth potential of the company.
'To say that a company is sound, that company must maintain adequate liquidity. A good operating record with consistent growth record implies low business risk and reasonable financial risk. There is need to watch out that there are no obnoxious figures, that the financial statements are good reflection of reality," Lawal added.
Lawal, a member of the council of the Nigerian Stock Exchange said that investors should also consider regularity and the extent of dividend payment as well the rate and regularity of bonus issue to estimate possible return on investment.
He noted that the composition of board and management and the general corporate governance structure of the company would influence sustainable long-term growths and its general direction.
The GTI boss pointed out that investors should watch out for government's fiscal and monetary policies that could change economic direction and influence positively or negatively the fortunes of the quoted companies.
He added that investors should also take cognizance of performance trend of a company, compared with the overall market trend on the Exchange.
He urged directors of companies, shareholders, operators and regulators to work together to ensure reliability of company's financial statements, pointing out that financial statements form the bedrock of investment decision and as such should be accurate, reliable, relevant and timely.
Mr. Nicholas Okoye, a former general manager at the Exchange said that investors should look in the direction of stocks in the brick and mortar sectors. Hear him:'The stock market has companies that are brick and mortar companies of the economy. They are those companies that are investing in building materials and real estate, pharmaceuticals, food and beverages, retail and distribution, publishing e.t.c. These are the things that our people need on daily basis. This is why I call them the brick and mortar companies of the economy. If the economy is doing well, these companies will do well because demands for their products will drive their earnings. And mostly, each of the companies has shareholder value as its goal."
However, the market at the moment provides opportunities for investors to reposition for future robust returns, particularly in equities with strong fundamentals that are at their year low or a little above their year low.Equities that had returned impressive earnings per share in their results provide a good investment opportunity also. For the traders, they should consider newly listed equities as they are likely to attract capital appreciation as their certificates are still generally available in the market and equities that are expected to release impressive results.They should also consider other stocks with strong fundamentals that had experienced price decline of above 70 per cent of their year high; a rebound is likely in their prices.
Sectors that look promising for investors this new year, going by their fundamentals include: Insurance, conglomerates, healthcare, automobile, food and beverages, chemical and paints as well as industrial/domestic products. Others are real estate, emerging markets, breweries, printing/packaging, agriculture and maritime.Also in the group are: Banking, construction, petroleum and aviation.
These sectors still have some cheap stocks.When we say cheap stocks, this does not necessarily mean equities that are declining in price but stocks that have strong earnings relative to the current market prices at which they are selling on the floor of the Exchange.
They are also called undervalued securities because the market does not recognize the real worth of the equities. Analysts are of the view that it is the worth of the equity that gives discerning investors the confidence to enter such companies before the market identifies such stocks. When investing, there is a difference between value equity and a stock that simply has a declining price. It is true that during a bearish session of the market, stocks' prices experience general fall but equities with good earnings and positive qualitative factors would always sustain their prices.
When a stock that is trading at about N18 suddenly drops to N8, this does not automatically mean that the equity is cheap, but less expensive now compared with when it was selling for N18. If this drop was as a result of the market reacting to fundamental problems in the company, that's too bad, but if not and the company's fundamentals are healthy enough and its potentialities are intact, it implies that it is worth more than N8. Investors always compare current share price to intrinsic value.
Insurance
The Insurance sub-sector of the market has experienced a hard time during the re-capitalization period and the recent verification exercise by the regulatory body (NAICOM). The exercises have made the sector more attractive but discerning investors who go for value investing should watch out for equities with strong earnings and good potentiality.
WAPIC will continue to be attractive for medium term investment. Crusader Insurance, International Energy Insurance, Mutual Benefits, Custodian and Allied Insurance and Sovereign Trust Insurance are good at their current prices for long term buy, while Staco Insurance and Standard Alliance are attractive for medium and long term investment.
Market analysts have also picked Cornerstone Insurance as a good buy, citing the past performance of the company and its brighter prospects after consolidation. Market optimism on the performance of Cornerstone Insurance was premised on its performance over the years and many opportunities opened by the insurance reforms.
Cornerstone has consistently paid dividend since inception with regular bonus issue. Between 2001 and 2005, its compound annual growth rate (CAGR) in profit after tax stood at 20 per cent, shareholders' funds has 26 per cent, while dividend has CAGR of 30 per cent. Cumulative return on investment since 1997 was estimated at 900 per cent in 2006, while within the past five years, cumulative return was estimated at more than 347 per cent, an average of 69 per cent per year.
Conglomerates
Watch out for Transcorp as the stock becomes cheap. Investors who are unable to enter the equity during the company's initial public offering and the private placement can take position now for long term investment not because the stock price has dropped but as a result of strong potentiality in the stock.Also in the same industry, AG Leventis and John Holt look attractive for long term investment.
Breweries
International Breweries remains the most attractive equity in this sector. The price of the stock was on technical suspension at 94 kobo in September and the public offer was selling at 87 kobo. It is obvious that the company's fundamentals are not too strong but with the acquisition of 60 per cent of the company by a foreign firm, the stock looks good for long term investment. Currently, the stock is selling for above N2.50 per share.
Champion Breweries is good for medium term now that the suspension on the stock's price has since been lifted as a result of the just-concluded right issue. Guinness is suitable for medium and long term as the company declared a dividend of N4.50 for its shareholders. This will positively impact on the price for the short term. Owing to improving earnings of Nigerian Breweries, the equity looks attractive for long term investors as an interim dividend of 55 kobo was declared by the company.
Food & Beverages
Long and short term investors should watch out for Seven-up Bottling Company as the N1.30 dividend declared is likely to impact positively on the stock price. National Salt looks good as the company recovers from its loss position to profitability. Nigerian Bottling Company earnings are also improving. Dangote Sugar is also a good buy even at the current price.The company has lived up to its promise of paying quarterly dividends to its investors. It is currently expanding its business offshore. The company has also emerged as the winner of the NSE president's annual award for the sector. Criteria for deciding the winners included satisfaction of statutory requirements; compliance with listing and post-listing requirements; readability of annual reports; comprehensiveness and innovativeness; and financial performance/return on investments
Chemicals and Paints
Almost all the stocks here are a good buy. The performance of African Paints and Chemical and Allied Products(CAP) in terms of price appreciation and dividend is a tonic for the rest of the stocks here.
Aviation
There is the possibility that airline services and logistic would rally up again from the current market price. This can be attributed to the scarcity of the stocks on the trading floor of the Exchange as a result of inavailability of share certificates for shareholders who bought into the company through private placement. This stock looks attractive for short and medium term if investors could get it now. NAHCO is currently selling its shares at N27.50k. This stock looks good due to its sizeable share capital and the nature of its service in the industry where it operates.
Banking
It is apparent that virtually all the banks are approaching the market for the second time to raise additional funds after consolidation in the industry. This is also an opportunity for investors to create wealth especially now that the CBN has dropped the verification of allotment from its schedule. This will speed up listing of banks' shares immediately after their offers. However, this will make banking offers attractive for medium and long term investment.
FCMB looks attractive on the strength of its recent public offer, impressive 28 kobo first quarter earning and recent partnership agreement signed with a foreign oil exploratory company. Also, the bank plans to have a mortgage institution as a subsidiary.
Bank PHB still looks good, having concluded its share reconstruction months ago and closed its initial public offering recently. As the bank expands its branch network, this would impact on its earnings subsequently.
Wema Bank looks attractive due to its proposed public offer. The equity is good for both medium and long term investments.
Unity Bank looks good for long term investment considering the price at which it is selling and the one for 10 bonus announced by the bank. With the view that no banking securities would be selling below N20 before the middle of this year and the possibility of the incumbent government impacting on the bank, its prospects are bright.
Fidelity Bank is a golden opportunity for medium and long term investments. Ecobank also looks attractive at the market price of N7.95 per share. The price is currently on technical suspension in readiness for its public offer which is expected to open very soon.
Construction
Equities in this sub-sector have created value for discerning investors who know how to identify the stocks. Costain Plc looks attractive on the strength of its first quarter earnings of 73 kobo and the presence of a foreign partner that acquired 51 per cent stake in the company.
Building materials
This is another sector that is very promising going by Okoye's definition of brick and mortar. This is so because the sector consists of companies whose products are always in demand come rain or sunshine.
A peep into the performance of sectors in the Stock Exchange shows that the building materials sub-sector is not behaving badly. For instance, in 2006, with 146 percent returns on investment, the building sub-sector came second behind automobile with 206 per cent. Among the best individual stock performers, Benue Cement Company (BCC) headed the group of the best performers in the year with 440 percent return. Its share price opened at N6.84 and closed the year at N37. It was followed by a fellow stock in the building materials sub-sector, WAPCO, with 212 percent return. It opened at N17.31 and closed at N53.99. Another cement stock, CCNN, came third with 171 percent return. It opened at N7.95 and closed at N21.57.
Printing & publishing
This sector looks attractive as the fundamentals of the individual stocks there are very strong. For instance, Academy Press recorded 258 per cent capital appreciation in the first eight months of 2007.The stock opened the year at N1.56 and closed the year at N5.42, that was after reaching an all time high of N6.82 per share, signifying a 337 per cent growth. Analysts believe that most speculators get into any stock that has a low value.
Another advice always given by experts is that one should choose a cocktail of equities rather than just concentrating in one sector.
According to Mr. Olutola Mobolurin, the Managing Director of Capital Bancop Limited, 'the reason you choose a range of specific investments is that you also want to be sure that you don't concentrate risks, so that if something happens, you don't lose all your money; you diversify your risks. For those who are sophisticated in their approach, they would also ensure that even in diversification of investment portfolio, you don't choose companies that behave in the same manner. For instance, you don't pick companies in the same industry.
That is not diversification. If something happens and that industry goes down, all the companies go down as well. So, you pick companies that may react in opposite manner, so that if one industry goes down, you know that the other may not or may compensate for the reduction incurred. You try and have a balanced portfolio; you ensure that the portfolio is not skewed to one end."
There is also a note of warning while investing on both public offer or the primary market and the secondary market. According to Mr Abayomi Obabolujo, a stock market analyst and publisher of Stockwatch , primary market prices are not real in a liquid market.
'This is because primary market prices in a bullish session are high regardless of the seeming discount relative to the secondary market price at which such a stock went on technical suspension to pave way for the public offering. Thus, investing in the primary market during a bull session is risky in the short term.
This is predicated on the fact that prices do go haywire during a bull session upon which quoted companies in need of capital latch onto on to raise additional funds by issuing few shares. Technically speaking, banks' public offerings in 2004 and 2005 were cheaper and less risky than the current prices at which they approach the market; more so, as the factors that had aided their price increase in the last two years had been more of market liquidity and sentiment and not necessarily sound fundamentals. Hence, for as long as the bull in the market is sustained, maybe prices of the current public offerings may be sustained, but think! What if not?
'Where to dwell during a down secondary market which is propelled by an active primary market is not necessarily the primary market issue but the secondary market, particularly in the stocks of companies that may not likely approach the primary market for additional funding or in those that had done so and really experienced a decline except in cases of public offering and private placements.
Don't be lost in the theory that ‘when the price of a stock on technical suspension is lifted, price goes up.' Please note if the secondary market remains weak when the technical suspension on the price of a stock that had just concluded its public offering is lifted, the rally to see would be shortlived as the price would steadily decline such that the wide margin between the market quotation and the offer price would diminish. In fact, in some cases, market quotation comes below offer price. But in cases of initial public offering and private placement, non-availability of the tradable instrument-share certificate -would sustain the price to certain extent.
Investing in the primary market after a bull session shouldn't be intended for the short term. Instead, make it a medium to long term investment with own fund and less of borrowed funds except if the fund is for the long term with rock bottom interest payable at back end.
Please note that short term borrowings with compound interest would leave you in debt. The quality of offerings to invest in also should be considered. The best approach would simply be to invest in companies you can afford to hold or even buy more of in the secondary market, should the price decline below the offer price."