I was having a casual chat with Mrs Akinyemi just a few weeks back on equity price movements. She (Mrs Akinyemi) believes that equity markets move in cycles. She further stated that in the Nigerian equity market, a cycle often sets in around November of every year to terminate around April of the following year. This, she has proven over the last seven years. Meanwhile, Mrs Akinyemi is an active stock investor cum trader with over thirty years of experience. And in the last ten years or more, she had traded actively in stocks listed on the floor of the Nigerian Stock Exchange, as her only source of livelihood after over thirty years as a Banker in a first-generation bank.
Like I did say to her in our discussions, I do know that equity markets do move in cycles but this is not sacrosanct, in other words, investment decisions shouldn’t be hinged on the mere fact that equity markets move in cycles or that the cycles so understood should be the target and nothing more. Fundamentally, I believe that equity markets move in cycles as responses to changes in certain motivating factors that do often occur within those cycles. In other words, I don’t believe in the so-called cycle movements of equity markets so much as in the changing faces of factors to which equity prices and markets do respond to at intervals. What I’m I saying? Very simple, I don’t follow cycles, I do follow market stimulus hence, I will rather counsel that you keep your gaze on the forces behind those cycles and not just the cycles.
I like to state placidly that Mrs Akinyemi was right in her assertions on the November-April cycle of the Nigerian stock market. Why? Her November-April cycle observation is true as a response to the release of third quarter earnings of and by quoted companies beginning from October. And since other results, prominent among which is the audited isn’t expected in the market till April of the following or even beyond, third quarter earnings’ effects remain firm on market movements till around April of the following year. In view of this notion therefore, it becomes the responsibilities of investors to keep tab on third quarter earnings as they are released to the market.
Just as it has always being, 2018 so far hasn’t shown any difference as third quarter results are here and as expected, savvy investors in the Nigerian equity market should gear up for critical analysis, leading to serious actions/position taking for the best of returns in stocks entering into 2019. But why should investors and market operators alike focus on third quarter results? I mean, why is third quarter results so important to the market? Let’s reason together.
Why Third Quarter Result is Important to the Market:
A Glimpse Into Final Benefits/Dividend: Third quarter result is the last of management accounts from quoted companies, released to the public thus preceding audited accounts which often comes with final benefits- cash or scrip to investors. Please note that management accounts are released statutorily for information purpose only as they are not audited or made available to any regulator before the release to the market and the public except on rare cases hence, with third quarter results at hand, investors are equipped with enough figures with which possibilities of final benefits can be glimpsed into. In other words, a clearer picture of what a company might have in store for its shareholders are seen in third quarter earnings hence, making projections easier though there might be exceptional cases. Please note that some companies might decide to present an audited third quarter results. When such happens, it only makes projections easier.
Delay In Audited Reports: Management accounts being what they are, often hit the market faster than audited reports. In other words, while it takes between thirteen to fifteen weeks’ timeframe between first and second or second and third quarter results’ release dates for highly compliant companies, the timeframe between the release of third quarter and full year accounts can’t be earlier than seventeen weeks while the break could be as long as thirty weeks in companies operating in highly regulated industries like banking and insurance. This is so for proper audit, presentation of audited accounts to the audit committee and the board for discussions and approvals which could sometimes take four weeks or more and for highly regulated industries, audited accounts would have to be presented to the apex regulators for endorsement. In such cases, adjustments as recommended by the apex regulator could delay results of companies operating in such industries for months, within which period, all that the investing public would have to make do with will largely remain the third quarter reports released in say fifteen weeks earlier.
Manipulations: In some extraneous cases, quoted companies have been accused of manipulating quarterly reports being management accounts, seeing that such accounts are not audited or presented to any regulator for ratification. It has been discovered that in a number of cases, earnings as reported within the first three quarters of the year do always show incremental performances whereas, the performance at the last quarter of the year had often failed to follow previous growth pattern thereby suggesting a measure of adjustment in the audited reports to reflect the true position of an organization after the processes of audit and ratification by regulator as well as other parties which include audit committee and the board.
In view of the above therefore, it suggests that the significance of third quarter reports to the market can’t be overemphasized hence, every investor must take a special look at and act appropriately.
How to Use Third Quarter Reports:
What should investors seek to see in third quarter reports and how should investors position to act at the release of third quarter earnings? Let me share a few here.
- Go back two quarters to see the performance pattern within the current financial year of the company in question. In other words, what has the earnings trend been like in the first and second quarter levels? Please note that companies with consistent incremental performances are most suitable for investment purposes as the probability of better last quarter performances are higher. You might choose to dwell on the reasons for inconsistent performance patterns in those you find not to have shown a consistent pattern because really, some companies do have such cyclical trends in sales for which reason the quarterly performances are bound to vary sharply. Note such and act appropriately.
- Add up the three-quarter earnings that you now have to see what the average performances would be. This is important as to project what the dividend possibilities are. To do this right, you might now need to consider previous year’s performances to see any similar trend or divergence. Companies with identical trends with previous years’ performance level are easier projected than companies with divergent. In cases of divergent, seek to know what the issues are, with the mind of taking the inherent advantages or pull off in earnest.
- The industry where the companies you are researching operate is key. For example, manufacturing concerns tend to release audited reports to the market faster than bank and insurance companies. Equities like Vitafoam and Nestle and in some cases, Cadbury had been noted to be among early results in the market every year as their results often hit the market between four to eight weeks after the end of their financial year but you will agree with me that bank stocks aren’t so however, banks are still lot better than insurance in the release of audited reports as reflected particularly in the last ten financial years within which most insurance companies had found things so difficult, having to grapple with new challenges posted by the new international accounting standards. Summarily, note the period to expect the audited results with the release of the third quarter result and position right.
- Please note that quarterly results in isolation will not determine equity prices even in the very short term hence, learn to keep tab on prevailing market state to measure probable impact of third quarter performances on stock prices. In other words, positive earnings in an uptrend will most probably lead to further uptrend while a positive earning in a downtrend might not impact much. Negative earning in an uptrend won’t move price up in as much as the decline might not be sharp.
- Ten percent price circuit and twenty percent daily price range will propel a fast reaction to earnings report thereby leading to early equilibrium price level in response to earnings. The implication of this is that a positive result might not experience a bull run for more than a few days if at all after which profit takers will hit to slow down price activities, ditto negative earnings. The best every investor must learn to do at this point is to be technical analysis compliant for the best of short-term market play in anticipation of audited reports. Investors who might not be desirous of technical analysis skill might at the end of an initial rally in response to positive earnings take profit for a re-entry when audited report is near in equities where projections on final dividends are positive.
- The best every investor should do in actual fact is to forecast into Q3 earnings before the release date while action should be taken in situations where earnings release are not in same proportion as forecast. In situations where a company surpasses earnings forecast, decisions to either hold or buy more might be justified. Should such a stock decline after release of Q3 earnings, the fact that the forecast is met or surpassed should build the confidence of such investors to hold. Panic is a major enemy of investment.