Last week, we discussed the intrinsic value of a share compared to its market price. Now, remember, it’s a “share” of a company, which is why our analysis today is focusing on how to analyse the company itself in order to reach a fact-based conclusion before investing in it.
Before we proceed, it is important to note that every company is set up to grow. This is because the business of a company is growth. Whenever a company fails to grow, it dies.
So, how do you analyse a company in order to reach a fact-based conclusion prior to investing in it? Below are some of the best ways to do that.
Valuing the company: Every quoted company is required to make periodic disclosures on its financial performance. The Income Statement (Profit and Loss Statement) of a company tracks how much profit (or loss) a company is making. The aim is to show revenues and expenses, thereby giving you clear insight on whether the company is deserving of your investment.
The Balance Sheet: The Balance Sheet is a snapshot of the company’s financial condition. Its focus is usually a year. It shows what the company owns, listed as assets and liabilities, and how much the shareholders have invested in the business, listed as Shareholders’ Equity.
In summary: Assets= Liabilities + Shareholders Equity
Cash Flow: The Cash flow statement shows how the company gets cash, and how that cash is deployed, over a period of time; usually a year. The objective of the Cash Flow statement is to show the net cash position of the company.
So, how do we value a company? I have a quick checklist.
Market Share: What market is the company in? is that market growing? what share of that market does the company’s brand or company have? Are the brands market leaders? Reading the Chairman’s and Management’s comments in the published Annual Accounts will give you an indication of new plans, competitive environment, threats to the company etc. Note, however, that these are often subjective. This is because they give you a direction, which must trend towards growth.
The market share must translate to sales: Read the Annual Reports, there is a page near the end that has a five-year summary of accounts. Sales should be increasing in percentage terms all these years, if not find out why.
Sales should lead to Operational Profit (gross profit), i.e. the proceeds from sales should be able to pay for the operational expense of the company such as rent, PHCN, Commissions etc. You can also get this information from the annual report of the company.
If the company is borrowing to pay salaries, then that’s a red flag. It’s important for the company to make a profit from sales.
Operational Profit and Net Profit: Ultimately, Operational Profit should lead to Net profit. The company should also generate enough profits to pay all costs which are not sales related eg government taxes, auditors remuneration, long term investment projects etc.
Also, it is important to look at the 5-year summary. The company should be profitable, unless it’s a new company with high initial costs, in which case you are looking to see if losses were reduced each year.
This then translates into cash generated. A company can manipulate profits but can’t manipulate cash earned. You can get the cash earned from the cash flow statement which, in my view, is the most important measure of financial strength. A good company must produce cash to pay salaries, dividends, fuel cars etc. When you look at the Cashflow statement, you want to view surplus cash generated from operation (i.e. total cash flow less Operational cash and Investing cash flow.)
Dividends: Cash generated should then be paid as dividends. So, you are looking at dividends yields which is the divided paid divided by the price of the stock. However, some companies may not pay dividends, but reinvest the cash earned to grow the company. There’s nothing wrong with that, but then the share price must rise to compensate you for not getting cash.
The result of your valuation/analysis: If you get a positive in all these, then the company seems good. if the trend of market share to sales to operational profit to net profit-cash to dividends is broken, find out why, that’s the analysis part. But also look at Return on Assets and Return on Equity which are all in the annual report.
Remember that a Low Price Earnings ratio is good, a High Earnings per share is also good, and all these are available in the annual report.
Finally, remember Management Quality is extremely important. The Company is managed by people. Therefore, the quality and experience of the management team should be part of the things you consider before investing in a company.
How investing in US, UK stocks can be seamless – Tosin Osibodu
Tosin Osibodu discusses how investing in foreign stocks can be a more knowledgeable and transparent process.
Investing in stocks has always been touch-and-go for Nigerians, both at home and in diaspora. A typical tale of the-more-you-look, the-less-you-see, many Nigerians have experiences – both real and imagined – of how they have lost some money in the stock market.
Amidst all of these, startups offering an opportunity to invest in foreign or local stocks have the problem of trust to deal with, before they can successfully break into the market.
Co-founder and Chief Executive Officer of Chaka, Tosin Osibodu, said this was a major challenge for Chaka when it launched in 2019.
Tosin was a guest on Nairametrics’ Business Half Hour radio programme where he explained that with Chaka, investing in foreign stocks have become a more knowledgeable and transparent process that enables investors to make informed choices.
Chaka, as Tosin describes it, is a gateway that allows Nigerians to easily invest in local and foreign stocks, and also allows those in diaspora to invest in local stocks.
According to Nairametrics’ investment analyst, Olumide Adesina, Chaka “makes it easier for many Nigerians to access world brands like Coca-Cola, Pepsi, Twitter, Facebook, Amazon, General Electric, and provides top-class access to stocks listed.”
With Chaka, global stocks such as Apple, Alibaba, Google, Manchester United, the S&P 500 index and several others listed on NASDAQ, the New York Stock Exchange, and the Nigerian Stock Exchange, and top brands from over 40 countries are only a tap away for investors.
Averting the sour experiences
Sour experiences in investing are usually a result of poor knowledge of the market, and little or no access to market insights. As Tosin explained:
“The market is not bad everywhere at the same time. The secret is knowing the right market to invest at any time, and having the right information.”
Information about market fundamentals, insights and knowledge of the right portfolio at any time will guide an investor towards taking the right buy-hold-or sell decisions, and the Chaka weekly webinars offer this.
Apart from the regular insights, investors can also rest easy knowing that they have the backing of financial regulators such as SEC, NSE, CSCS in Nigeria and SEC, FINRA, SIPC, IRS in the U.S. This is no mean feat for investment start-ups and Tosin admitted that getting the approval of these regulators formed a large part of the initial challenges.
Building automated trading systems to create wealth
During the years spent schooling as a systems engineer in the US, Tosin observed the ease of investing in the stock market, a direct contrast to what was obtainable in Nigeria. Though a systems engineer by training, he was passionate about solving the problem, and reducing access barriers to local and global markets.
Back in Nigeria, he teamed up with his life-long friend and cousin, Bolanle Osibodu to set up Chaka.ng. With a core financial expert and a systems engineer, the company was all set to get rolling.
The goal was simply to reduce barriers to trading stocks across borders, and help Nigerians cash into the emerging mine that was the stock market.
With the Chaka solution, investors can register, get verified, buy and sell stocks the same day. The no-minimum investment rule also makes it open to beginner investors, allowing them to buy as much as they can afford.
For instance, even though the share unit of a company is worth $500, an investor may invest $100 and free up funds to build a well-rounded portfolio. According to Tosin, “if you are above 18 years and interested in investing, we don’t believe that you should be restricted by funds”.
It also has other unique features like the Naira or Dollar conversion on a per-asset-basis so that you can see how a Naira investment would perform in dollar assets or vice-versa. Its low transaction charges and wire transfer fees makes it even more affordable for Nigerian investors, especially since there are no hidden charges.
There are other companies who serve as digital brokers to Nigerian investors. But rather than see them as competitors, Tosin and his colleagues regard these startups as potential collaborators.
“Anyone that does what we do and shares same vision is a potential collaborator,” Tosin said.
One of the ways of collaborating is by providing execution services, white-label services and market automation technologies for corporate and institutional clients, so that these companies integrate Chaka into their operations to provide solutions for clients such as KYC verification, and user-onboarding.
Chaka partners with Citi investment capital in Nigeria and a global broker in the US, through which its offers are regulated by the relevant bodies. The aim of all collaborations is not just for profit but to improve client trust, increase foreign direct investment, and improve the investment income of Nigerians.
“Our focus is to create an amazing customer experience, because the more you can service customers in the way they want to be serviced, the better it is in the long term. This is seen in our lower commission rates, seamless onboarding process, best prices. We are focused on giving the buyer the most transparent offer,” he explained.
With a team of technologists and financial professionals working around the clock, Chaka remains on course to continually improve investment offers, and provide better decision-making tools to customers.
How to invest in small-cap stocks
Small capitalized stocks according to the NSE are listed companies with a market cap below $150m.
There are two meat-pie shops in a city. One has two locations, while the other is a mega meat pie chain with 100 locations. Assuming they both have the same profit margin say 20% on cost of sales, which meat-pie chain will make more in terms of revenues?
Simple, the 100-location chain will have a higher sales volume and revenues because that chain can sell more pies. However, in terms of which restaurant is growing faster? Well, the answer is the smaller chain. How? The smaller restaurant is able to add say two more shops and grow by 100%, the larger chain can add 20 new location and just grow by 20%. A smaller base can grow faster than a larger base; its math.
This is the same for stocks. All things being equal, a company with a lower share price is able to see an appreciation in her share price faster than another company with a higher-priced stock. Look at it this way, a share price movement from N1 to N2 represents a 100% gain in market price, but a stock priced at N200 per share will need the share price to move to N400 for a similar gain of 100%.
A small capitalized stock will have a faster growth rate than a high capitalization stock because the lower-priced share can double faster than shares of higher-priced high cap stock. This is the lure of smaller capitalized stock; they can post price increases faster than large-cap stocks.
Small capitalized stocks (small cap), according to the Nigerian Stock Exchange, are listed companies with a market cap below $150 million. Capitalization is simply the total number of shares issued by the company multiplied by the share price of the stock. As at June 2020, small capitalized stock had a cumulative market value of N971 billion ($2.51bn). Small caps as a sector also outperformed the total NSE ASI index – the small caps returned a negative -6.61% as compared with negative -18.31 returned by the broad NSE index of all listed stock.
Small caps stock is sometimes termed as growth stock because they still have tremendous opportunities for growth. In our earlier example, the meat pie company with just two outlets can grow to add hundreds of new outlets, thus boosting earning and subsequently the share price. This means when the investor is considering small-cap stock, he is looking for a high growth stock, in this case with a slightly higher P.E. ratio but trading at a price below future earnings. Small-cap investing is trading on price movement, not dividend per say, its trading not on market share but price movements, It’s a momentum play. Whilst earning is important in setting a future direction for the share process, the investors is focused on price arbitrage to take advantage of mispricing. This makes trading in small caps very risky and capital can be lost.
How does investor trade on small cap?
Since the driver is momentum trading driven by daily prices, a key metric to screen with is price movements of 15% band from 52-week price high of small caps (N60b in market caps) with an average 90-day trading volume of 2m shares with a Price Earning ration below 15 and Earning yield above 15%
From my screen, I get these candidates:
- Berger Paints
- Fidelity Bank
- Fidson Drugs
- First City
- May and baker
- United Capital
- Vita form
Again, you can construct your own screen. What is key is to seek out a stock with a market cap below N60 billion, that is constantly trading but selling today at a price below its 52-week high. This pricing can simply be the result of COVID-19 induced slow down. Then buy that stock at a price that is “cheap” hence the lower P.E. Ratio, most importantly, you want to build in some risk management by buying high historical dividend yield stock to ensure if you have to hold, you receive a divided yield higher that the risk-free rate.
Stock trading is risky and you can lose your capital, the stocks listed above are illustrative and do not constitute buy or sell advise.
Nigerians reveal why they pick their favourite banking stocks
Experts give their opinions on their favourite banking stocks and why they chose them.
It’s no longer news that Nigerian banks play a leading role in Nigeria’s financial system. However, the banking sector, which has over the years been the most liquid sector in the Nigerian stock market, has experienced significant price swings lately.
Also, based on recently released financial statements by the Nigerian banks, a high number of listed banking stocks in the Nigerian stock market have the potentials to reward investors with solid returns, as they remain fundamentally good and are expected to withstand the current unfavorable economic climate this year.
Nairametrics interviewed some financial experts, entrepreneurs, and corporate heads and asked for their opinions on their favourite banking stocks and why they chose them.
Their reasons for selecting these bank stocks were instructive and varied, from the usual tier-1 banking brands (GTbank, Zenith Bank, Stanbic Bank, Access Bank) to other emerging brands like Sterling Bank. See their responses below.
Jerry Nnebue, Banking Analyst at CardinalStone Research
“Lower interest earnings (due to low yields and the slowdown in loan growth) and deterioration in asset quality are likely to pressure returns due to the pandemic. Prudential ratios could also be severely tested.
Nevertheless, we see opportunities in specific names due to depressed valuations and their ability to withstand the potential short-term pressures from the pandemic.
Notably, we favour GUARANTY, ZENITHBANK, and STANBIC on their stronger ROE potential and wider capital buffers over the regulatory minimum.
We are also optimistic about FBNH following the recapitalization of the commercial bank and the impact of years of loan book clean-up.”
Silas Ozoya, Managing Partner/CEO SUBA Capital
“Investing in Nigerian banking stocks would mean me looking at their performance over the last 5 to 10 years. In terms of innovation, stability, growth, the dividends declared, and market capitalization.
When you measure with those, a few banks would come to mind.
GTBank, Access Bank, Zenith would be my top three picks, then Sterling Bank would follow. Those guys have been doing some amazing product innovation that deuces sales for them.
Then finally, First Bank, because of its long time stability. It would function like the hedge in the portfolio.”
Yele Bademosi, CEO, Bundle.africa
“GTB because they still have a very strong brand reputation amongst millennials and Gen Z and they’ve shown a history of innovation with products like **737**, Habari, and Quick Credit.
Access Bank, the merger between Diamond and Access creates one of the largest banks in Nigeria, whilst the jury might still be out on the success of the merger.
I wouldn’t bet against the leadership team to make this a success.
Sterling Bank is my top pick because I think they have the largest potential for growth, they have a unique structure and clear focus areas that are centered around technology and innovation that I think could pay serious dividends in the future.
Their vision is bold and it’s going to be the execution that makes or breaks them.”
Darlington-Morsi Onyemaka, Co-founder Quba Exchange|Forbes Accelerator Cohort ’20
“Sterling Bank (STERL).
First of all, the Nigerian stock market is mostly suitable for long term investing, and as such, my investment criteria are leadership and innovation.
In the area of leadership, I’m very confident in Abubakar Suleiman’s leadership for Sterling Bank given his track record and age.
STERL also ticks the box of innovation with the introduction of its online bank (One Bank) which positions them to withstand and likely outperform emerging competitions in the online banking space.”
Omeiza Makoju, ACCA energy analyst
“In the last 6 months, the banking sector has been hard hit by the COVID-19 scourge, the “staggered devaluation” of the Naira, stringent regulations from the CBN, and the drop in oil prices.
As a value investor, my favourite banking stocks in no particular order are GTBank, Zenith Bank, UBA, and Access Bank.
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I choose these banks because they have strong fundamentals and metrics. They are all dividend-paying with yields above 10% and the P/B (MRQ) of Zenith, UBA, and Access Bank shows that they are currently undervalued.
At a time like this where the Naira/USD Exchange rate and the inflation rate is rising,
I have also chosen these stocks because they provide some form of inflation protection in the absence of USD instruments.”