Further Examples of Technical Investing in the Nigerian Stock Market

As a follow up to my last article, Examples of Technical Investing in the Nigerian Stock Market; Utilising the EPS of a Company, I thought it necessary to give a sounder foundation of the ideas represented in it. So here are a few more examples to boost your investing knowledge pending a more thorough research on your part.

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.
Awaken the EntrepreNoir Within. Promoting financial literacy one article at a time.

Examples of Technical Investing in the Nigerian Stock Market: Utilizing the EPS of A Company

Corporate earnings drive the market. It’s that simple. While short-term
factors, such as the influx of money into the market, or even shocking or tragic
events, can have an effect over the short term, ultimately, it is earnings that
drive a company’s stock price. Understanding this fundamental principle can help
you make long term investment decisions. Peter Lynch, The Fundamentals of
Investing.

Although we are about to talk on technical investing (also called speculation), I still used the above quote to make a point. The point is: in the long run those who invest in the long term do better in average percentage terms than those who speculate (unless you control a huge amount of funds AND can pull off a coup like Soros did). Usually it is not as straight forward as that, but I seem to follow a simple rule; if you have a lot of money to invest, invest fundamentally (In the long term). But if what you have is relatively small, horn your speculating skills.
Truth is; it is a lot easier to speculate in the Nigerian Stock Exchange than many other places in the world. Nigerians are very emotional people, and when it comes to money, they are hysterical! Buying cheap and selling astronomically is very common on the NSE.

I leave the reader to determine what a lot of money is and what it’s not. Like I said earlier, it is a relative thing.

1. Impressive Quarterly Earnings Relative to Current Price

The earnings per share (EPS) of a company is a derived figure that plays a very important role when speculating in the Nigerian Stock Exchange. Indeed, a lot of people have made money just by paying attention to this figure alone. Some Nigerian stock “specialists”, such as Hope Eno, even consider the EPS of a company the fundamental basis of speculating. Though the EPS of a company does not paint the entire picture of the company’s financials, over half of the time it gives an approximate guide; just enough to speculate at least in the Nigerian Stock Exchange for now. However, it is worthy to note that knowing the present earnings per share is NO substitute for indebt perusal of a company’s financials which gives a broader margin of safety.

Comparative Analysis: Over time, experience has taught me that for greater percentages of the time, prices compete on the NSE by comparative analysis. What this simply means is that; in speculating the movement of a share price, one usually just needs to compare derived figures such as the EPS with that of other companies preferably in the same industry. An example would be more illustrative:

Earlier in the year (February 4) I was running through the stock listing page in Stocks Watch magazine when I noticed an amazing difference in price between Ekocorp and Evans Medical. Ekocorp was selling at N1.92 while Evans Medical was at N6.83; a whooping 256% difference. Now this is the shocker: they had the same third quarter earnings at 0.34! This was a no-brainer! Any one can predict that the share price of Ekocorp will eventually try a match up with Evans Medical, all other things been equal. Although this is not always the case, it turned out to be true. Ekocorp went on up to sell at an all time high of N6.78 and by the week ended April 27, it sold at N6.11!

Is it really that Simple? In the NSE it could be that simple save for a little more watchfulness. In the example above, it would pay a little better if you knew what was driving the price of the reference company, in this case, Evans Medical. If there are no positive news (to be discussed later) that might have caused an increased interest in the stock of Evans Medical that would increase demand and subsequently drive the price, you might have found yourself a winner as was the case above.

How to Calculate the EPS of A Company: The calculation of the EPS of a company is pretty easy. It is given simply as:

PAT
------------------- (divided by) --------------------
Total Number of shares held by shareholders

Where PAT = Profit After Tax

Therefore, for a company like Dangote Sugar Refinery Plc, whose annual report I have in my hands now, with a Profit after tax of N16,657,066,000 and total number of shares held by shareholders of 10,000,000,000, its EPS is simply given by:

EPS = 16,657,066,000 = 1.67 (approximately)
-------- (divided by) --------
10,000,000,000

Where to Find Already Calculated EPS of A Company: Most business papers give the EPS along side the company name on their stock list page notably; Financial Standard and Stocks Watch. So you could just pick one up and check it out.

Advantages of Learning to Use the EPS of A Company

1. It gives you an idea of when to get in and when to get out. E.g. in my example above, Ekocorp didn’t go up 256% in an unbroken run, occasionally it fell short of expectation before moving up again. However with the price of Evans Medical to guide you, you could sleep easy knowing it hasn’t achieved its full potential. Note that it is always better to sell (speculatively/technically) before the stock achieves its “full potential.” This is because at that point a lot of other speculators will like to sell too. This causes a glut, excess supply, thus driving down the price.

2. With results being released quarterly and various companies having different year ends, the opportunities for positive speculation are bountiful.
Knowledge of both the EPS and year ends of various companies provides a powerful tool for the speculator in the Nigerian Stock Exchange. In the corporate world, companies have the liberty to choose their year ends e.g. Wema bank plc has its in March, Guinness has its in June and PZ industries has its in May. Hold that in mind. Quarterly results are results released every quarter i.e. every 3months (a quarter of 12months/1year). Thus the random year ends of various companies means results (thus EPS) are released almost every month. This creates a dynamic market for speculators (read opportunities).

3. After the release of the 1st and 2nd quarter results of a company, the EPS gives you the opportunity to take position in the medium term if the outlook gives a good sign. An example will be more illustrative: Recently UBA released its 2nd quarter results and the EPS was derived to be N1.20 (its share price is held at N37.99). Now, Zenith with a 3rd quarter EPS of N1.64 is selling at over N45.00. (Does this give an idea of where UBA will be in coming months?). UBA needs to add an EPS of 0.44 to its present N1.20 to match up Zenith in earnings. You can BET* UBA will do better than that. Considering its 1st quarter EPS of N0.63, 0.44 is a piece of cake under present circumstances. So if it’s going to match up in earnings then why not in price?

As an exercise consider the 3rd EPS of Intercontinental Bank Plc against that of Guaranty Trust Bank at this date. What do you find?

4. You could tell when the company is overpriced.
Yes, by comparing the price of a company against that of other companies with similar EPS, you could get an idea of when the company is busting the “Price fabric” at the seams. In clear terms; when the company’s price is over that of its peers.

Interested in knowing more about EPS and related ratios? You could begin your research by reading the articles in the EntrepreNoir’s Library. Remember the bottom line given by Peter Lynch: … ultimately, it is earnings that drive a company’s stock price.


The BET* here shows a certain degree of risk. Invest at your discretion. Every thing written here is for educational purposes only. The writer will take no responsibility for loss of resources as a result of the utilization of the information on this page

Awaken the EntrepreNoir Within; promoting financial literacy one article at a time.