Think back to the year Nigerians made wild profits in the stock market. It’s 2008. That same year qualifies as the worst year ever for investors. The power of greed was so great that it pushed the stock prices beyond their true values.
Those who are well informed and experienced make maximum profit and exit the market. Others who were affected by the herd effect were not so lucky. They got trapped when the prices fell. It was a painful experience for the bookies. Statistics show that investors have lost about 3.9 billion Naira.
Now the share prices in the Nigerian stock market look very attractive but investors are afraid to take the risk of putting fresh funds into the market. The feeling of fear is really ruling now. Smart investors know that this is the right time to buy cheap and get high volumes. But on what will you base your investment campaign this time?
There is widespread concern about a global recession, the closure of margin facilities by banks, the devaluation of the naira, and a general slowdown of the economy. As a forward-looking investor, what criteria should you use to pick stocks in these tough times?
This is the question I want to answer in this article.
factors to consider
1. Historical Stability
Barring any unforeseen circumstances, companies with a history of profitable performance over the years will continue to improve upon best practices to please investors. Recall that First Bank ventured into investing in the emerging communications market in Nigeria through ILLs some time ago. That deal went sour but the bank did not go through as a result. Years later, it continued to release favorable results and pay dividends and bonus issues to investors. Currently, this stock is making investors happy. First Bank has been consistent over the years and has a strong reserve base.
2. Competitive Advantage
Companies with a premium performance in the market over their peers stand a good chance of surviving these tough times. Strong brands like Cadbury and UACN will continue to dominate the market. Their products have been permanently registered in the minds of consumers in Nigeria. These products will continue to be sold. They are also restructuring and introducing new products that consumers are buying. The more people patronize these products, the higher the profitability with good management of human and material resources.
3. Strong Financial Base
Companies that have been making profits for years now have something to weather this downturn to fund projects that will add value to their markets and give good returns to investors. UBA and GTB Reserve Building are financial powerhouses. The strong reserve base is largely responsible for their expansion in overseas markets. Here you can see pure gold. What do you think investors will enjoy when those overseas branches start turning profits? Good timing and definitely high return on investment especially on return of bulls.
4. Highly Profitable
Not all companies have the ability to manage resources well to maximize profits. The tax management of some institutions is so poor that it eats deep into their profit margins. In the banking industry, Ocean Bank stands out in terms of prudent portfolio management. Making profit is not everything. Having enough to keep is a skill that pleases investors.
5. Totally Undervalued
Equities that are undervalued are the first to rebound in a bull market. You are not going to make profit on the return of the bulls. Your profit margin is fixed at the time of your investment. Taking the risk of investing when company valuations are low guarantees you higher returns when the market recovers. Unity Bank is currently enjoying Agriculture facility in terms of loan from World Bank. At the current market price of less than 3 Naira, the stock is grossly undervalued
Winning Attitude For Predictable Profits
* Continue to invest fully
* Invest in fundamentally strong equities
* Don’t pay attention to the economic forecast and be determined to excel in any economy. Stock market always outperforms in long term and it 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
1. Agriculture
The sector is emerging as a major contributor to Nigerian GDP and earnings. New frontiers in livestock and cocoa processing are yielding positive results. Listed companies like FTN Cocoa Processors, Livestock Feeds and Okomu Oil promise good prospects.
2. Food and Beverage
Even in times of recession, people will continue to demand food and its confectionery. The reasoning for why this sector will perform is simple. As long as humans are alive, there will be a demand for food and beverages. With good management, companies in this sector such as Dangote Sugar, Tantalizer, Flour Mills and Honey Well will continue to delight investors by paying dividends.
3. Banking
Nigerian banks are currently aggressive in their expansion drive in Africa and beyond. Income and profit will soon start appearing in the balance sheet. Some banks like First Bank, UBA, GTB, Zenith and Bank PHB have done well and will continue to reward investors in the downturn.
4. Communication
The Nigerian communications sector is one of the fastest growing in the world. Despite all the structural challenges, companies operating in this sector are making wild profits and investors are looking forward to higher profits from their operations in 2009. Starcom is the only stock listed in this sector on the Nigerian stock market. It would not be a bad idea to invest in it now.
5. Conglomerates
History is on the side of this area. They have the ability to reorganize and remodel their businesses, especially in difficult times. Stocks like UACN will keep investors happy
6. Transportation
Monopoly thing. ABC Transport is the only listed company in the sector on the exchange. It has been paying dividends consistently since its listing in 2006.
7. Insurance
The insurance sector is currently enjoying goodwill and protection as investors position themselves to reap long-term gains. Companies like International Energy Insurance and Cornerstone are extremely attractive.
Learn how to reduce your risk by committing the largest portion of your available funds to the food and beverage sector. Thinking long term is a surefire strategy that will guarantee your success in 2009 and beyond.
