The entrance of smart money into equity space in search of higher returns has paid off for the Nigerian equity market as bullish sentiments persist. Year to date the market has returned 21.63% as All Share Index closed at 32,647.10 points as against 26,842.07 points in December 31, 2019.
Investors have often been advised to take position in fundamentally sound stocks but the big task I guess is how to identify these fundamentally sound stocks among numerous stocks listed on the floor of the Nigerian Stock Exchange, and that is why we deem it fit to delve into this subject.
Fundamental analysis is used to measure the intrinsic value of an equity by examining related economic and financial factors including the balance sheet, strategic initiatives, micro economic indicators, and consumer behavior associated with that firm.
Fundamental analysts study anything that can affect the stocks’ value, from macroeconomic factors such as the state of the economy and industry conditions to micro economic factors like the effectiveness of the company’s management.
So, how does one identify fundamentally sound stocks?
These are few things one must have in mind when you think of stock Fundamentals:
- Quality of the management
When evaluating an equity investment, understanding the quality and skill of a company’s management is key to estimating future success and profitability.
Technically speaking, the management of a publicly traded company is in charge of creating value for shareholders and it is normal for management to possess that supreme qualities to run the company in the interest of the owners. Of course, it is unrealistic to believe that management only thinks about the shareholders. Managers are human too and are like anybody else, looking for personal gain. Problems arise when the interests of the managers conflicts sharply from the interests of the shareholders.
Looking at the stock price alone, can give false signals. In fact, several great companies all over the world have soaring stock prices despite corrupt and inept management operating behind the scenes. There is no magic formula for evaluating management, but there are factors to which one should pay attention.
While it’s hard for retail investors to meet and truly evaluate managers, you can look at the corporate website and check the resumes of the top guys and the board members.
Insider buying and Stock Buybacks is also a good factor to consider. If insiders are buying shares in their own companies, it’s usually because they know something that normal investors do not. Insiders buying stock regularly show investors that managers are willing to put their money where their mouths are. The key here is to pay attention to how long the management holds shares. Flipping shares to make a quick buck is one thing; investing for the long term is another.
Checking the track record of the top management, especially the CEO is very vital too. There are business one should can enter into just knowing who is behind such business through his or her track records.
- Corporate Governance
Corporate governance describes the policies in place within an organization denoting the relationships and responsibilities between management, directors and stakeholders. For instance, the reason why Guaranty Trust Bank selling over Zenith Bank is corporate governance and the shareholding structure. Due to the ownership structure in Zenith Bank, investors do fear what will happen to Zenith Bank should anything happen to Jim Ovia. Corporate Governance is not as high in Zenith Bank compared to Guaranty Trust Bank because Jim Ovia’s vote will be a veto vote. So whatever he wants, if he raise up his hand, it is done. But in Guaranty Trust Bank, no person actually hold the veto vote, it will be a shared vote at the end of the day.
- Quality of earnings
Another thing to look at is the company’s earnings. Is the company’s earnings growing or stagnated over a long time and without anything. What is the quality of earnings they are bringing?
Current or recent earnings is the fixation of many investors. These are nothing more than snapshots of where a company is, or was, at a given point in time. To see where companies are likely headed, look for earnings momentum. That is the slowing or acceleration of earnings growth from one period to the next as demonstrated by patterns.
Look for these patterns by examining earnings reports over the previous eight quarters, and reading analysts’ projections for future earnings. If a company posted its best earnings of the last five years, two years ago, and has been lackluster since, it may be under increasing competitive pressure.
It is said that when a small boy fail an examination, he will come home and say he has lost is report card. But he if came first, before he gets home, he would have already announced that this is my report card. It also depends on hour early these companies release their result.
Just like Zenith and Guaranty among others that will release their result on time because they have something to showcase.
- Price movement
Also check the behaviour pattern of the prices of companies you intend to invest in. When the market is bad, all stocks will be affected, but the moment the market becomes good, some stocks are leaders that will herald the rally in the market. That is when you will see the MTN raising their head, you see the Dangote Cement raising their head, you will see Zenith, Guaranty, First Bank, UBA.
You need to pay attention to the products of the firm you intend to invest in. For instance in the cement industry, WAPCO has lost its market share to Dangote Cement substantially in the southwest.
Another example is the Oil Palm business. There is no substitute for palm oil; Okomu and Presco will continue to enjoy that. So if you need palm oil, you either buy from Okomu or Presco.
- Industry the firm belongs to
The industry a firm belongs is critical to its growth. For instance, the industry the oil companies belong is affecting them.
Oil companies at the moment are not fundamentally sound because their fundamental which is their product is being hampered by world’s crude price. They can’t grow the way they use to grow. Oil firm used to be determinant of the direction of the market, but since crude oil came down, they have lost it.
STOCKS TO WATCH
Between the October 6 and November 10, the share price of the big elephant has appreciated by 17.36% from N6.05 to N7.10. The bull is not done with the big elephant so long the new interest rate regime is in favour of equity market.
Most indicators on the technical chart including RSI, MACD, Williams’ %R and Stochastic are giving BUY recommendation for First Bank of Nigeria Holdings.
The result of the company is beginning to be good. They have started posting better result than what they used to post. At the current share price of N21, WAPCO is about 2.78% away from its 52 weeks high of N21.6 and it is tending towards a new support level. On the technical chart, MACD, Stochastic and RSI give a BUY recommendation for WAPCO.
Access Bank eventually closed at N8.9 after touching a high N9.00 during before close of trade.
The share price of the bank has 52 weeks high of N12 and low of 5.30. Relative to the current share price of N8.9, Access Bank is trading 67.92% above its year low of N5.30 and 25.83% away from its year high of N12. At that Access Bank has an uptrend potential 25.83%.
A strong BUY is recommended for Access Bank on the technical chart.
Over the past 26 years, Access Bank Plc. has evolved from an obscure Nigerian Bank into a world-class African financial institution.
Herbert Wigwe’s name is a household name as far as banking is concerned. He is taught to be intelligent and he is a good manager. They leveraged on the outlets of diamond bank, so they can penetrate and deploy their product direct to the people.
The share price has not gone so far. It is currently trading at N8.80, though it traded flat on Tuesday. The current bull has the capacity to push the share price of UBA upward. UBA has touched a high of 9.25 and a low of N4.4 in the last 52 weeks. Going by its year high, UBA is 4.86% away from its 52 weeks high and this suggest there is still uptrend potential for UBA. On the technical chart, a STRONG BUY is recommended for UBA.
Year to date, the share price of Neimeth has gained 254.84% as it grew to N2.20 from 0.62. Pharmaceutical firm will continue to enjoy the bullish run most especially has the quest for Covid-19 vaccine is ongoing. A STRONG BUY is recommended for Neimeth Pharmaceuticals on the Technical Chart.
Other stocks to watch include Zenith Bank, Guaranty Trust Bank, Fidelity Bank, Glaxosmith, among others.