1. Proposed Public Offer/Right Issue
When news gets to the investing public that there is going to be public offer or right issue for a particular company, the price usually adjusts upwards for various reasons. Some of these I'll share with adequate historical events to buttress my point.
a. The company offering the stocks might use its financial muscle to affect the demand and supply of the stock thus causing "artificial" scarcity with a consequent effect of a positive price adjustment. How do they do this, you may ask. Well, the company sends representatives to the floor of the exchange and buys up most all (if not all) of their available shares on the floor. This is usually called mopping. Mopping is a process of increasing demand which supply may not be able to meet, driving up the price eventually. Remember the case of UBA public offer? Many market analysts where of the opinion that a subsidiary of the company mopped up their shares to drive it to the point of N37.99 where it was suspended technically. Again you might wonder why they do this. The reason is; they want to be able to tell the public that their offer is selling at a discount while still maximising their income! UBA eventually sold at N34 for the right issue and N35 for the public offer. A discount you might say, but is it really?
b. Also the increase in demand of a stock relative to supply and the consequent price rally could be as a result of investors getting in on the stock in order to take advantage of a relatively cheap right issue.
So how do these affect technical investing on the Nigerian Stock Exchange? By joining the "bandwagon" (the "herd"), a speculator can take advantage of the price increase and make some money on the positive percentage increase. But in this case, speculative investing should be done very wisely because one cannot tell for sure when a technical suspension will be put on the stock to give room for the public offer/right issue.
For further research please consider, Access Bank plc and First Bank plc.
2. Positive News that Indicates a Possibility of Good Returns
There is really no specific example of "positive news". It is anything that might indicate a rise in profit for the organisation in question. With this in mind many examples have availed themselves in the past months on the Nigerian Stock Exchange.
Do you recall the rise in price of Dunlop to an all time high of N8.94 when the possibility of a monopoly on the exit of Michelin came up earlier in the year? Or the price rally of FCMB and Costain on the news of new core investors (Helios Investment Partners and Shoreline respectively)? Or the unprecedented movement of Tripple Gee on the CBN annoucement that it is to be the only indigenous company to print cheques? Consider also the astronomical rally of National Salt (NASCON) on the news of its merger with Dangote Salt.
As you can see positive news come in various forms and are usually the most frequent and most volatile form of technical investing available. Speculators can take advantage of this by putting their ears to the ground, e.g. by browsing the internet and reading financial papers, to get a hint of what is happening to these institutions at any point in time. It will amaze you the amount of money you could have made if you had ordered your stockbroker to buy Costain just after reading of its takeover by Shoreline in the Punch.
3. Introduction of a New Product
The introduction of a new product could also mean an increase in stock price of the manufacturer if the product has the potentials of beating available competition in the open market. A very good example is the share price of GlaxoSmithKline (GSK) on the re-introduction of Macleans toothpaste. As a personal assignment you could also research the price rally of May & Baker on the introduction of Mimee Noodles.
4. A Suspected Bonus Issue.
May be you need to be reminded that the way
things work in the Nigerian market is that when a bonus is issued even by a dead
company, the price responds positively. Besides, price response is also directly
proportional to the ratio of the bonus being issued. Abayomi
Obabolujo, Chief Research Officer, Stocks Watch.
In an earlier article, in an attempt to define technical investing, it was noted that emotions/sentiments of the investors drive the stock market an any point in time. It was amazing to see WAPCO (West African Portland Cement Company) reach an altitude of N80.00 based solely on the rumour of a 1:1 bonus issue (of course it was just a rumour and the price crashed soon after this was realised). This was a typical illustration of sentiments driving price. Investors where demanding the stock based on what they heard without bothering to check the financials of the company to see if it could fund such a scrip issue. Anyway this was just one of the usual anomalies of the Nigerian Stock Exchange. What happens more often is a true bonus issue. Take the example of Nestle surpassing the N300 mark (N347.14) on the news of a 1:4 bonus issue also take Guaranty Trust Bank plc hitting N37.89 on the news of a 1:4 bonus issue. We really should not forget Ashaka Cement present price of over N70.00 in anticipation of a 1:4 bonus issue. Even more important is NAHCO's ridiculous price of over N70.00 on the annoucement of a scrip issue of 3:2. It is pertinent to note that Coretrust & Investment Limited considers NAHCO overpriced with an intrinsic value -77.73%. Meristem securities has also termed NAHCO a sell stock at its present price of over N70.00.
I always advise a detailed research before any investment is made in any company at all. And it will do good to always remember Peter Lynch's advice; ...ultimately, it is earnings that drive a company's stock price.
Happy researching.
This essay is written for educational purposes only. Please do your research before investing.
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