Think of the year when Nigerians made obscene profits in the stock market. It is 2008. The same year qualified as the worst year investors ever had. The power of greed was so great that it pushed up the prices of stock beyond their true values.
Those who are well informed and experienced made maximum profits and exited the market. Others who were moved by the herd effect were not so lucky. They were stranded when the prices came tumbling down. It was a painful experience for speculators. Statistics reveal that investors has lost close to 3.9 billion naira.
Now stock prices in the Nigerian stock market look very attractive but investors are so afraid to risk putting fresh funds in the market. The emotion of fear is really reigning now. Smart investors know that this is the right time to buy cheap and acquire high volume. But on what premise would you base your investment drive this time around?
There is widespread concern about the global recession, freezing of margin facilities by banks, devaluation of the naira and general slowdown of the economy. What criteria should you use to pick stocks in this hard time as a forward looking investor?
That is the question I wish to provide answer to in this article.
Factors To Consider
1. Historical Stability
Companies with history of profitable performance over the years barring any unforeseen circumstances will continue to improve of best practices to make investors happy. Remember that First Bank sometime ago took a risk to invest in the emerging communications market in Nigeria through ILL. That deal went sour but the bank did not go under as a result. Years after, it continued to post favourable results and paid investors dividend and bonus issues. Currently, this stock is investors delight. First bank has been consistent over the years and has a strong reserve base.
2. Competitive Advantage
Companies with premium performance in the market over its competitors stand a good chance of surviving this hard time. Strong brands like Cadbury and UACN will continue to make waves in the market. Their products have been permanently registered in the minds of consumers in Nigeria. These products will continue to sell. They are even restructuring and introducing new products which consumers have been buying. The more people patronize these products, the more the profitability with good management of human and material resources.
3. Strong Financial Base
Companies that have been building reserves over the years from the profit made have something to fall back on in this bearish season to fund projects that will add value to their markets and give good return to investors. U.B.A. and G.T.B. are reserve building financial power house. The strong reserve base is largely responsible for their expansion into foreign markets. You can see pure gold here. When those foreign branches start yielding profits what do you think investors will enjoy? Good time and high return on investment of course especially at the return of the bulls.
4. Highly Profitable
Not all companies have the ability to manage resources well for maximum profit. Tax management of certain institutions is so poor that it eat deep into their profit margin. In the banking industry, Oceanic bank stands out in terms of prudent tax portfolio management. Making profit is not all that matters. Having enough to keep is the skill that delight investors.
5. Grossly Undervalued
Equities that are undervalued are the first to rebound in a bullish market. You are not going to make the profit at the return of the bulls. Your profit margin is decided on the timing of your investment. Taking the risk to invest when the company is undervalued guarantees your high returns when the market recovers. Unity Bank is currently enjoying agricultural facility in terms of loan from the world bank. At less than 3 naira current market price, the stock is grossly undervalued
Winning Attitude For Predictable Profits
- Continue to be fully invested
- Invest in fundamentally strong equities
- Ignore economic forecast and be determined to excel in any economy. The stock market always outperform on the long term and is the only solution to inflation as far as your money is concerned
- Continue to acquire more financial and investment skills
- Be less emotional in your decisions
Sectors And Stocks To Watch
This sector is on the upswing as a major contributor to the Nigerian gross domestic product and earnings. New frontiers in livestock and cocoa processing are turning out positive results. Companies listed e.g. FTN cocoa processor, Livestock Feeds and Okomu Oil offer promises of good prospects.
2. Food And Beverages
Even in a recession people will continue to demand for food and its confectioneries. The logic why this sector will perform is simple. As long as man lives, the demand for food and beverages will continue. Coupled with good management, companies in this sector e.g. Dangote Sugar, Tantalizer, Flour Mills and Honey Well will continue to delight investors in paying dividend.
Nigerian banks are currently aggressive in their expansion drive to Africa and beyond. The income and profit will soon start reflecting in the balance sheet. Some banks e.g. First Bank, U.B.A., G.T.B., Zenith and Bank PHB has performed well and will continue to reward investors while the bears reign.
Nigerian communication sector is one of the fastest growing in the world. Despite all the infrastructural challenges, companies operating in this sector has been making obscene profits and investors stand to benefit more from their operations in 2009. Starcom is the only stock listed in this sector for now on the Nigerian stock market. Investing in it now will not be a bad idea.
History is in favour of this sector. They particularly have the ability to restructure and remodel their businesses in trying times. A stock like UACN will continue to delight investors
Talk of monopoly. ABC transport is the only listed company in this sector on the exchange. It has been consistent in paying dividend since it was listed in 2006.
The insurance sector is currently enjoying goodwill and patronage as investors continue to position themselves for long term profit taking. Companies like International Energy Insurance and Cornerstone are highly attractive.
Learn to commit the largest part of your available fund to the food and beverage sector to minimize your risk. Thinking long term is a sure strategy that will guarantee yours success in 2009 and beyond.