Wole Olajide, ACS
Investment in the stock market requires deliberate effort to ensure more wins and fewer losses. At that, it is important for investors to know what to do per time relative to the seasons and times in the market.
There are seasons and times in every stock market community. There is the earnings season when results are released; this happens at least 4 times in a year. There is the bullish season when prices are generally up, even if there are no results being released. There is also the bearish season when prices are generally down. For sure, there are periods when the market is sideway; that is, when the market is neither bullish nor bearish.
The fourth quarter of the year 2025 will end in a matter of two weeks. To be precise, by the end of January 2026, that is, in 6 weeks’ time should have published their unaudited Q4 2025 results. Smart investors are already taking position against the nearest earnings season.
How do you invest in earnings season?
The most mistake people make all the time in the market is a situation where investors do rush to invest with the release of quarterly reports, audited reports or declaration of dividend. That’s actually a wrong way to invest in the stock market. Investment in stocks is done against expectation and not on realities. In other words, you are buying into a company based on what you think you can get; that is expectation. For instance, when you are putting your money in a stock, it is because:
- You hope that the price of the stock will grow more than it is now along the line.
- You are buying today because you hope and expect the Company to be there, bigger and better in years to come.
If your expectation is that an institution will soon be gone and out of operation, you will not be investing in it.
Expectation is the mother of all investment strategies. At that, investing only after you have seen the result of a stock is wrong. It is a wrong approach.
How should you be investing?
- Invest long before the next quarter’s result is released.
- You must always have an expectation of the outlook of the next quarterly report.
- Then invest, take position and wait.
- The next line of action should be first to monitor price direction while you are waiting. Price may be fluctuating. So long as your expectation is intact, wait.
- Results when released will form the answer to your expectation.
- If the result is good, then you have passed. You might decide to wait or buy more. You might decide to wait in the stock, buy more or even sell; take out your money and move on to another stock.
- If your expectations are not met, taking a decision appropriately should be expected.
How are expectations formed? How do you make up your mind to invest against that expectation? The following should form the basis of your expectation:
- Listen very carefully to news about the organisation. It could come through the pages of newspaper. It could come on the social media. It could come among your friends. It could come from people working within the organisation. When you are interacting and relating, also keep your ears on the ground because some of the information that filters to your ears could actually be processed and make use of to benefit you as you invest in stocks.
- Look at the product and services of the organisation.
- Look at the Board and Management of the organisation
- Consider the previous results of the institution; that is, quarterly reports, audited reports and history of dividend payout.
So, for you to invest well in stocks, seek to lay hold on what the company’s earnings always look like. Is it improving yearly? Is it declining, fluctuating or stagnant? You need to get this information yourself.
How to Pick Fundamentally Sound Stocks on NGX
We 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 Exchange.
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.
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 company’s 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 businesses one 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.
It is the system of rules, practices and processes by which a company is directed and controlled. Corporate Governance refers to the way in which companies are governed and to what purpose. It identifies who has power and accountability, and who makes decisions.
Good corporate governance ensures that the company has the proper rules, policies and practices to create long-term value for shareholders.
- 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 without any improvement? What is the quality of earnings being released?
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. 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.
- Price movement
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.
- Product
You need to pay attention to the products of the firm you intend to invest in. For instance, in the cement industry, the company with the largest market share is Dangote Cement, and it will continue to sell as long as there is infrastructural development in Nigeria. Another example is the Oil Palm business. There is no substitute for palm oil; Okomu and Presco will continue to enjoy that.
Fundamentals changes. It doesn’t mean that when you are fundamentally strong today, you are going to be fundamentally strong forever. There is no bad stocks forever and there is no good stocks forever.
When we say fundamentally sound stocks, it does not mean that the one you are taking position in, you are expecting for it to be fundamentally sound forever. You keep reviewing fundamentals from period to period, say 3 months, 6 months, 9 months, 1 year and still know that they are fundamentally strong.