The Nigerian Stock Exchange (NSE) All-Share Index (ASI) in the past few weeks has been bearish. Year to date gains has since dropped to 6.6% from January’s high of 15.95%.
Investors have however increasingly shifted their focus to smaller cap stocks. In Wednesday’s trading session, Jaiz Bank was the top gainer as it appreciated by 10%. Learn Africa was last week’s top gainer, up 18.56%. Prior to that, LASACO Assurance emerged as the top gainer, up 21.2%. For the week ended 13th April, Wema Bank was the 2nd best gainer, up 32% and topped only by GSK Consumer (which has been in the news due to its payment of a special dividend).
And what about Thursday’s trading session? The top 8 in descending order were Oando, Courteville, Eterna, Fidson, Wema Bank, Sovereign Insurance and Hallmark Insurance and Equity Assurance. Apart from Oando, these are all small-cap stocks with limited upsides in the medium to long-term.
These stocks are often referred to as Jump in Jump Out “JIJO” stocks and are typically bull traps that we like to avoid by all means. Despite the risks inherent in JIJO stocks, investors still find them very attractive and flock towards them at the slightest sign of a bull run.
Characteristics of JIJO stocks
Just like Ponzi schemes (not saying they are Ponzis) JIJO stocks have the incredible knack of returning huge returns in the short term. From experience, they can return as high as 120% over a period of two months before receding.
Don’t rely on Fundamentals
Also, they need not have strong fundamentals to attract investors. JIJO stocks, more often than not, do not pay dividends, are not up to date with results and sometimes, are perpetually loss-making. Nevertheless, investors flock to them like fleas.
JIJO stocks are also lowly priced, giving investors an impression that they are cheap; whereas the stocks are often regarded as being cheap when their price earnings ratio and price to book ratios are well below industry average or trading below their perceived intrinsic value. For most investors who love JIJO stocks, a stock with a share price of 50kobo can get you 200,000 units with just N100,000.
When they move, they gallop
Because of their low costs, the prices can rise rapidly as you don’t need so much in terms of market capitalisation to acquire enough volumes that can turnover. Share prices rise or fall when volumes turnover via transactions.
In a bull trap, stocks that have been declining in price suddenly start climbing. This spike is temporary however and is usually followed by a sharp and sustained decline in price. In fact, when the price starts dropping, you hardly see anyone looking to buy.
How to benefit from this
Some experienced investors that we have spoken to explained that they take short-term positions in such stocks because of the lucrative returns and the adrenalin rush of trading high-risk equities. They enter the stocks currently bubbling and exit at 15-20% after a few days. Cheap transaction fees mean that a round trip (a buy and sell transaction) would only cost a maximum of 3.2%.
Most of them told us that they set an exit target and when they hit it, they bail out. “Those who get trapped here often do so either because they are greedy, or are not paying attention to market trends” one trader who declined to be named explained to Nairametrics.
Newbies should be cautious
We do not like trading JIJO stocks and avoid them.Trading in such stocks is like engaging in a Ponzi scheme; the first movers are typically the ones who make the most money, while those who come in at the tail end of the ride, typically lose out. You really have to be trading stocks for a living and have a knack for high-speed adrenalin pumping trade.
Retail investors, who have returned to the market following last year’s stellar performance, should be cautious. They would be best served if they stuck to blue chips and mid-cap stocks with fundamentals.