- Q2 earnings, Book value, Year Low Price Analysis
If investment in stocks is treated as normal transaction of buying and selling, the best for an investor at any point in time is an entry at relatively comfortable price, with the mindset for an exit at higher price level than the entry. At that, due considerations are needful at the entry and close monitoring in the process of holding the stock. These are essentials seeing that market trends and fundamentals do change and in most cases, in the opposite direction to performances of specific companies.
When a market losses its fundamentals in disregard to performances of listed companies, it behoves on the investors in such market to sell stocks and hold cash, hold on to existing positions, do fresh purchases or buy more of existing holdings. Such decisions as the case may be should not be frivolous but hinged on certain motivations which could vary from one investor to another.
There’ no gainsaying the Nigerian market is in a downtrend. Truth is that whenever such is experienced in any market, while some equities will justifiably trend down, very many others will simply become cheap and good enough for either a further hold irrespective of price decline, fresh purchases hinged on not current market relationship with the stock but a focus on the company and in some cases, additional purchases now at a lower price to boost current holdings. Technically speaking too, a down-trending market will produce cheap prices in stocks at varied periods within the downtrend. In other words, some stocks will become cheap earlier in a down trend than others.
It is noteworthy to categorically state the fact that equity selection process in a declining market might not come easy as there are many metrics that could be deployed. The question remains how and when does a stock become cheap? Let’ take a look at just a few.
- P/E RATIO:
Many times, a Cheap Stock could be easily be determined by a Low Price-to-Earnings Ratio but then, just like other metrics, there are limitations based on the cyclical nature of the companies involved but P/E Ratio is still largely considered as a back of the envelope analysis in finding a cheap stock. It sounds over simplified quite well but it remains true that the relationship between current price and earnings of a stock will largely remain relevant in the comparative analysis between one stock and another in same industry and between a year and another in same stock. Of course this is bound to change often and so should investors update the data base and keep tab on the changing figures to be well guided.
- YEAR’ LOW/ HIGH PRICES AGAINST CURRENT PRICE:
Technically speaking, tracking high and low price levels of a stock might just tell a little about how cheap or expensive a stock has become. In most cases, these are the prices that often form the support and resistance levels. Support is that price level a stock price gets to and it refuses to decline below while resistance is the level a price gets to and it finds it difficult to climb further at an immediate period as these are often later broken.
Questions need be asked if a decline persist. If such decline is propelled by either realistic or expected poor performance from a company, it could be said to be justified but in cases where a company keeps releasing good reports while the price dwells are support level or its year low, it could be technically stated that such stock is cheap at that price though further confirmation might be required to initiate a purchase. In most cases, a year low could be further adjusted down depending on the elongation of market downtrend. A stock that is trending around its year low is however such that should be paid close attentions to particularly if the company fundamentals are sound enough.
- BOOK VALUE AND PRICE-TO-BOOK VALUE RATIO:
A company’s book value is a figure calculated from the balance sheet of a company, it represents the net worth (assets – liabilities) of the company on per share. It is often referred to as shareholder’s equity.
How many of us can still recall the circumstances leading to the end of banks like Bank PHB and Afribank? The then management of the Central Bank of Nigeria did state that the shareholders’ funds of those financial institutions had been wiped off at the point of taking them over. Book value tells of the relationship between the assets and liability of a company.
Book value analysis brings to fore the question on what does an investor really buy in a stock, could it be the name, assets or what? It is arguable because stocks are not being bought for a company to be stripped and investors share the proceeds but truth is that it should be more that what an investor should be interested in, in a stock is the assets the institution has been able to accumulate over years and much more, future possibilities in assets growth. Book value simply tells of per share accruals to a holder of one unit of a stock should all the companies assets be sold. It thus infers that at every point, it should interest investors what the book value per share of a company is, relative to its stock price on the stock exchange which is the making of the market. In a situation therefore, where an equity’ price is lower than the company’s book value, such a stock could be considered cheap with higher possibilities of future price growth. This is not however to state that higher stock prices than book value should suggest a ‘no buy’ rating as that could suggest a level of confidence in the organisation going forward but even at that, such a stock could not be said to be cheap
‘Though it tends to only happen in times of severe economic stress, it is possible for a corporation’s stock price to fall below book value, meaning the stockholder has a chance to buy into the firm for less than the accounting basis of the net assets. If things turn around, this can be a huge windfall, albeit one that takes years to manifest.’
In view of the foregoing, let’s take a quick look at a few stocks within the limit of space.
ACCESS BANK PLC:
The first tier lender’s stocks had often rebound around N10 for the better part of 2018. A steady decline since August 8, 2018 brought it to a year low of N9 at the close of trade on August 24 having touched N8.85 on August 23, 2018. The stock has trended below MACD’ signal line since March 20 and had remained so. Shortly before then was when it commanded the highest volume so far in the year. Technically, there are possibilities of lower trend. What does that portend?
Access Bank’s Q2 earnings are being expected. Going by average performances recorded in the industry so far, the report is expected to show mild growth with at least 20kobo interim dividend. The board might decide to do much more.
On the basis of the bank’s 2018 Q1 earnings of 77kobo and its book value of N15.71, selling currently at year low of N9 makes the stock a bargain more so when its 2018 Q2 earnings is expected to hit the market any time soon.
UNITED BANK FOR AFRICA PLC:
UBA stock crossed down MACD’ signal line on May 17 2018 at N11.10 and had remained under. From the MACD, it is still largely trending lower all in response to market sentiment. Short term recovery is possible but how sustainable in the face of declining market?
The bank’s Q2 earning hopefully with an interim dividend payout is due. The result is not expected to be lower than its capacities hence, the expected short term recovery but how cheap is the stock at current level?
On the strength of its Q1 earnings of 67kobo and total equity, UBA’s book value at N15.72 and P/E Ratio standing at 11.94, make the stock a bargain at current price as it could be said to be selling at 51% of its book value. Notably, its Q2 earning is not expected to be lower than 85kobo with mild growth in its total equity for the period.
Selling at the year’ low of N8 remains an advantage but since the market is still trending down, why not keep tab on this stock and watch as the price resist further loss? Historically, capacity to bounce back to UBA is never a big deal.
HONEYWELL FLOUR MILLS PLC:
A stock with incremental performance in earnings but selling at about 41% of its year’s high can’t be but b said to be cheap. Relating this with its book value of N7.12, the stock becomes a bargain to those who can wait. This assertion is further aided by the relationship between its Q1 2018 12kobio earnings and current price of N1.47 thus bringing its P/E Ratio to 12.25. Even at the year’s high, Honeywell was still performing below its book value.
The stock’s highest period was mid January 2018. Attempts at remaining upbeat in March, April and May were truncated. It has remained largely low beat ever since.
Volume had been largely low, possibility of a short recovery possible with slim possibility of sustainability not because of poor performances but for current market downtrend. Keep a tab on the stock. It is currently cheap.
CONOIL PLC:
Except whenever there was release of ‘beyond expected’ earnings, Conoil is more of a quite stock that could go for days, stagnated in price. Price growth is largely in the stock, short-lived. Purchase is only advisable when dividend payout is guaranteed as compensation in price had not often been common but the truth remains that the company’s Q2 earnings of 79kobo is low relative to price, it infers therefore that future expectations is already built in it but then, its book value of N26.58 against current price of N24.30 from a high of N41.38 makes the stock somewhat cheap though the downtrend may persist.
FORTE OIL PLC:
At current price of N23, Forte Oil has lost 57% of its high of N52.50 and from the year’s open of N43.48, it has lost 47.10%. What makes the stock cheap include the 2018 Q2 earnings of N1.54 which brings its PER at current price to 14.94. If this is sustained to the end of the year, FO might be reporting PER of 8 or lower. It is the cheaper because its book value is N48.49 which makes the high price in the year appropriate.
Volume is often the issue with FO. It is such a stock that is worth being looked into against a saner climate at the market arena.
TRANSNATIONAL CORPORATION PLC:
Between 2009 April and February 2011, Transcorp’ stock price was stagnant at par-50 kobo. In those years, it was as if the price will never move anymore for life. It however recovered and by September 2014 touched a high of N7.08. if that was ever in the past of the stock, the lower the price comes could only be considered as buy opportunity so long as the company’s intrinsic values remain intact.
Having lost 24.66% YtD and about 57% from its N2.55 year’s high, Transcorp stock price is damn cheap in consideration of its 12 kobo 2018 Q2 earnings which brings its PER to 9.17 and its book value of N2.60. Please note, so long as the company’s assets are not being depleted, it will only take the market to recover and the price will reflect its true value.
Technically, there seems a short-term positive movement on the Stochastic but the MACD is still largely showing performance below the signal line.
DIAMOND BANK PLC:
The market had more or less dealt with Diamond bank on the strength of its poor showings in quarterly earnings than its overall valuation based on current total equity. But is the market not justified? After all, the company is not facing liquidation such that would make the book value the only consideration.
Diamond bank’ 8kobo Q2 earnings is considered rather low hence, its PER remains one of the least in the industry but then, with a loss of 26.67% Ytd and loss of 0ver 69% from its year’s high, any further decline in the stock price of Diamond can only make it cheaper. Its Q2 2018 book value of 9.56 is good enough to attract future patronage though ownership structure remains a major fear among the generality of investors.
Technically, Stochastic is showing short term possibilities while most other indicators are weak.
FIDELITY BANK PLC:
The bank’s 2018 Q2 earnings are being awaited; it could hit the market anytime from now. Being audited, it is expected that an interim dividend would be paid all things being equal. Based on the organisation’s 2018 Q1, Fidelity’ price loss of 35.37% YtD and 60% from year high of N3.99 is not justified under any circumstance. The fact that the company as at the Q1 2018 can boast of N6.20 book value the more makes the stock price cheap at current level of N1.59. The market of course still remains weak but that has only made a good stock in Fidelity become affordable. Going by its book value, its highest price in the year would still have been considered low. Generating P/E Ratio of 9.94 for the Q1 at current price level makes the bank’s stock price a bargain.
Intermittent upward price movement is possible but this would always be cut short because of current market state. Cheap stocks are most appropriate for buy and hold.
CONTINENTAL REINSURANCE PLC:
Apparently in a class of its own and excluded from the classification and current drive for recapitalisation as orchestrated by NAICOM, there should not be anything to fear, investing in Continental Re. The attraction here is the 2018 Q2 earnings of 23 kobo thus leading to a P/E Ratio of 6.09 at current price. This is more than good, if P/E Ratio is ever a consideration in equity selection.
Though the stock price is currently selling at the year’s low, margin from the year’s high is low.
Technically, the stock price is dwelling at a point where it is resisting further losses going forward. This is likely to be broken because of market weakness. At that, the stock becomes cheaper.
WAPIC INSURANCE PLC:
With a total equity in excess of N17billion as at half year, WAPIC qualifies to operate as a tier 1 composite insurance company going by NAICOM’ new recapitalisation policy for insurance companies in Nigeria. The company might however choose to further boosts its share capital via a primary market fund raising.
Its price is currently being depressed by the negative Q2 earnings. it remains a stock to watch going forward.