How To Analyse & Pick Top Nigerian Banking Stocks Today

How To Analyze & Pick Best Nigerian Bank Stocks – Learn How I Select The Top Performing Bank Shares To Buy, Invest In Using Quarterly & Audited Financial Statements

A few weeks ago, I had a training session with some group of friends to share strategies to picking stocks to trade and when to buy. While we explored some company’s financials to validate our buy or sell ratings, I quickly opened my live account on Meritrade.com platform to reveal my current stocks and reasons I picked each of the stocks. At the end of my analysis, a friend asked, why is a major percentage of your equity portfolio exposed to the banking sector? I knew someone will ask that question because, on the pie chart presented on my dashboard, they assigned percentages to sectors accountholders have more shares in. It was my response to that question that I am sharing this 4-day article on how to analyze and pick the best performing banks’ share to trade.

This doesn’t mean that banking stocks are the best of all the listed equities, after all, investors reaped a bountiful harvest in certain stocks outside the banking sectors, look at Dangote Sugar, May & Baker, Fidson Health Care, and Cement Company of Northern Nigeria, these stocks surged more than 100% last year. But, here is a catch I see more in the banking sector that I don’t joke with – it is called liquidity. Banking stocks record most trading volume in the Nigerian stock market which means institutional investors; fund managers, investment bankers, pension funds administrators, insurance companies are more active in that sector compared to others. I had shared an experience of how I was stuck in the insurance sector for two weeks, I couldn’t sell my shares in one of the listed companies in that sector as no one bid for stocks until the price from N1.75 fell to 50k.

The second reason is that the current economic cycle driven by rising oil price will support banking stocks to the upside as asset quality is going to improve, the value of non-performing loans is already at the peak and expected to fall as firms in various sectors like consumer good, industrial goods and oil sector are also expected to generate more cash from operating activities to financing their short term and long term obligations. The positive impact on banks financials will be reflected in their interest income and as the cost of borrowing reduces, finance cost is also expected to be lower compared to the similar period when economic risk was higher.

Also, banking stocks have shown resilience in the face of a difficult operating environment. These guys know how to pass their operational cost to account holders via charges and fees. I know two banks that are good at that, you can’t withdraw more than N10,000 at a go via ATM, so if you want N100,000 to finance emergency needs, be ready to make N10,000 withdrawals multiple times at N65 per withdrawal. These e-business channels drive their non-interest income.

And lastly, Investors love dividend income, banks are one of the consistent dividend payers in the Nigerian stock market.

These are the four key premises I stood on to build more of bank’s equity portfolio, but the question again is, does that mean all the banks are good to buy? Well, Yes/No. The sentiments on banking sector right now is positive so expect both performing and non-performing banks to have a share of that wave. Early this year (2018), we saw how Tier two banks (even when there was no fundamental news) like Skye Bank surged from 50k to N1.26, Wema, Unity Bank, and FCMB stocks, hence rewarded early investors as they all doubled their portfolio value in less than 30 days. The growth is generally attributed to the expected positive impact of the rising oil price on the banking sector.

Does it mean you should start picking any banking stocks randomly? No, the simple truth is “no matter how high or low a stock is, it will definitely correct itself to reflect the true fundamentals of the company”, so don’t just rush into any banking stock because prices are on the increase, do your homework, learn how to check key figure and estimate the value.

To help you find a better path, I will be sharing my researched steps to analyze and pick the best banking stocks to buy.

The way you analyze stocks in the banking sector is totally different from other sectors. Banks don’t sell physical products so you shouldn’t expect the normal sales growth calculation, cost of sales, inventory turnover ration, etc to suffix here.

See – How to pick best-performing stocks in consumer or industrial good sectors

If Dangote Sugar is on your watch list, the way you interpret their financial statement cannot and shouldn’t be the same as Zenith or UBA.

So, follow me as I share my practical strategies to pick best performing banking stocks.

Find top gaining banks

The mistake a lot of stock traders make is that they don’t have a planned and well-organized strategy to picking the best-performing stocks, They rely on their broker or financial adviser and whatever these guys say, they do. It’s not wrong though but here is a simple guide to picking one of the best-performing banking stocks:

See – How to know sector stocks investing are buying more.

  • Look at the banking sector’s index performance on a YTD ( year to date) and QTD (quarter to date) basis. The banking index closed the year 2017 at 73%, making it the best performing sector, so that is the first step.
  • Compare all the bank stock’s performance with the overall index.
  • Select the banks whose YTD, QTD, and MTD (month to date) stock price outperform the index; pick stocks that increased more than 73%.

Although you may see some bank stocks that lagged last year now ranked as the top performer this year, I still believe selecting banking stocks like this will help you focus on the best bank to invest in. 

Some of the banks that emerged from my picks are GTB, Zenith, FirstBank, Access Bank, and Stanbic IBTC.

See – How to pick best-performing Nigerian stocks

Understand the core business of these banks

Don’t just pick Zenith, UBA or GTB bank because you love the name but rather do your simple maths to understand the business of the bank. When I say “business of the bank”, I mean try to find out what the bank does and how they make money. As simple as this is, I will share a calculation that easily reveals the type of business a bank does. Never be too smart to say, I already know that banks accept deposits, pay a meager interest on savings and then give it out a loan at a higher interest, that’s all. You may be right but if you invest in that mindset, I bet you, you could miss out on the best bank to invest in right now. The reason is that it’s not all bank that is in the business of earning interest alone, some are investment driven.

Let’s use Zenith bank financial statement for the 9 months Sept 2017 to illustrate this:

As at 30th, Sept 2017, Zenith bank had a total of N5.1tr in asset out of which loan and advances were N2.1tr, that is 41%. If you look further, you will also see that the total investment in both fixed and equities is N961b (addition of N718b in treasury bills and N242b investment securities), which is 19% of the bank’s total asset.

Now, we can say that Zenith bank is a loan driven business because it has 41% of its asset in loan and advances. From this, you can also say that Zenith bank is exposed to loan risk because their major core revenue is interest income. At least, we saw how the bank’s exposure to Etisalat loan default affected its profit as its provided for non-performing loans.

On the other hand, if the bank’s asset had been exposed more to investment in securities, I would have said, it was an investment-driven bank.

How does the bank get the money?

Just as we have looked at the type of business a bank does, we also need to know how they source for the money. A bank can either get more deposit from customers or issue debt securities. Deposits are great for banks for the same reason you complain about getting low interest on your savings or fixed deposit account, banks are equally happy as you are lending them cheap money to lend out at a higher interest rate. If a bank can’t attract enough deposit, it has to issue debt securities like commercial papers or sell the equity side which is generally more expensive to finance. So, you see why banks will push their marketers to any extent in order to get that cheap deposit from you.

Using Zenith bank’s financials, let’s see how to get more money to give out as the loan by comparing their deposit to liabilities.

Zenith bank has over N3tr in custody as customers’ deposit, N4.3tr as total liabilities and that is over 75% deposit/liabilities which is quite reasonable and equally 70% customers’ deposit is advanced to customers. All these confirm to me that Zenith bank takes the deposit (cheap money) and gives out a loan with those deposits at a higher rate.

So, if I had said that banks improving margin will come from a higher interest income from reduced non-performing loan this year, Zenith bank is one stock you should watch out.

Look at the bank’s earnings figure

We have already deduced that Zenith bank is a loan driven business which means, the bank is expected to generate more profit from net interest income and compliment it with income from fees and charges, also known as noninterest income. Net interest income measures what how the bank makes money from borrowing from you at a lower rate and lend/invest at another higher rate via loans and securities.

Using the statement of profit or loss and other comprehensive income, let’s see how Zenith bank is fairing based on what they reported in 9 months Sept 2017, against 9 months Sept 2016.

Zenith bank earned N154b on net interest income down from N167b in the same 9 months period, 2016. This is attributed to more than 100% increment in the impairment charge from loan losses. Non-interest income, in the same period, grew from N94m to N169m; the bank was able to generate more money, outside interest repayment, from fees, charges from e-business channels. An increase in noninterest income (NIR) helps cushion the effect of interest rate volatility and loan risk but at times CBN regulation on fees may influence NIR; for instance, the suspension of ATM withdrawal fees a few years ago wasn’t good for banks as most of the posted a negative growth in their non-interest income.

From the statement presented, profit after tax grew by 35%, from N95b recorded in 9 months 2016 to N125b in the same period, 2017

To analyze the profit of Zenith bank, I check interest, noninterest earnings, and profit after tax, then compare with the previous quarter or fiscal year.

You see, there are many lines to look at in the financial statement of a bank, but these are the things I focus on first before doing my next check using ratios.

Metrics to analyze your bank

We have looked at the profit figures of Zenith bank and I can say that they are great but does that really mean shareholders are happy? Let’s see what the earnings power, strength, and value are:

Earnings power of your bank

Here, I always look at three things: return on equity (ROE), return on asset (ROA) and net interest margin.

The 9 month Sept 2017 ROE of Zenith bank is solid at 16.8% (N129b/N767b) against 13% report last year. ROA in the same period stood increased to 2.5% from 2% in 2016.

Breaking earnings power down further, you can look at net interest margin and efficiency.

Net interest margin measures how profitable a bank is making investments. It takes the interest a bank makes on its loans and securities, subtracts out the interest it pays on deposits and debt and divides it all over the value of those loans and securities. In general, it’s notable if a bank’s net interest margin is below 3% (not good) or above 4% (quite good). Zenith bank is at 4.95% (N154b/N3.1tr) against 5.5% in 2016. The fall, which is still among the highest in the banking sector, is not unconnected to the double-digit growth in impairment charges.

While net interest margin gives you a feel for how well a bank is doing on the interest-generating side, a bank’s efficiency ratio, as its name suggests, gives you a feel for how efficiently it’s running its operations.

The efficiency ratio takes the non-interest expenses (personnel and operating cost) and divides them into revenue. So, the lower the better. A reading below 50% is the gold standard. A reading above 70% could be cause for concern. Zenith bank’s operational efficiency improved from 36% in 9 months 2016 to 30.4% in 2017.

A bank may have unfavourable efficiency in certain quarters or financial year. This doesn’t mean they are not doing well, they could be investing in technology like banking channels or improving their customer service. Take note!

My next focus is the loan risk since banks make more money from the interest charges on loan and advances, it, therefore, means that an increase in impairment charge affects the interest earnings potentials. According to creditexplained, Loan impairment charges are basically money that is put aside by a bank in case its customers cannot make the required loan repayments, but which will leave a huge dent in a company’s profits. For Zenith bank, 2% of loan and advances were written as impairment charge compared to less than 1% provision in 9 months Sept 2016. 

I always use this to check whether the bank is good at lending money to customers who aren’t going to default. No bank can achieve 100% on this but the lower, the better. Zenith bank is one of the banks with the lowest non-performing loan ratio.

Lastly, let’s look at the bank’s share value using EPS figure. Zenith bank’s EPS figure is at N4.11 compared to N3.03 in 9 months 2016. Using Warren Buffet valuation approach, I divided the figure by 10-year bond yield of 13% to arrive at an estimated stock value of N31. Zenith bank shares, as at 7th, Feb. 2018, is N32.

Now, this is just third quarter EPS, if I project a full year EPS of N5, then Zenith bank’s estimated value will be N38 (5/0.13) which is 15% above the current share price.

I started buying the shares from N22, then added more units as the price drop and reversed from a key support region.

See – When is the perfect time to buy shares in a company?

To confirm my estimated value, take a look at GTB, the shares traded at N38 region when the bank reported an EPS of N4 in 2017. So, there is an upside potential in Zenith bank’s share.

Update: Zenith bank reported a 2017 full year EPS of N5.66 which presents an estimated value of N43.

Did you find this guide on how to analyze banking stocks interesting? please share any other banking stocks you feel will do well this year.

See – My Top Stock Investing Strategies 

When Is The Perfect Time To Buy Shares In A Good Company?

Best Time To Buy Into Nigerian Stock Market – Technical Analysis Of Share Prices Lets You Know When To Trade Cheap & Sell High Using Price Levels & Charts

While economic and fundamental analysis lets you uncover the top sectors to focus and the stock to rightly invest in, as I have shared on how to find best-performing stocks, you still need to perfectly have a good grasp of timing as a strategy in the stock market. As the saying goes, you can buy a good stock at the wrong time or buy the wrong stock at a good time. The latter has a higher chance of adding profit percentages to your portfolio even though the company’s fundamentals are not impressive while the former can drag you to a loss position. It all boils down “when you bought the shares”

Besides, one bad experience that made me take this advice seriously was when I invested in international breweries, I had shared my experience here on how I started trading the stock, mistakes and finding a better path to profit. I bought the company’s share at N24 and in few days, the price dropped to N16 and I quickly sold off, only to see the same stock reversed and surged to a new high. What would have been the missing knowledge that made me sell off quickly? I never perfected timing as a good stock trading strategy.

So, how then should I time my stock, after following your guide to picking the best-performing stocks to buy? The simple answer is, pay attention to stock price action at key levels and validate it with trading indicators. This is what we generally tag technical analysis of Nigeria stocks market.

Technical analysis is the process of analyzing and forecasting the direction of share price based on past movement or repetitive patterns. It helps you look at the overall market trend to ascertain investor’s sentiment about a company’s share.

A lot of traders have tried to compare technical analysis and fundamental in a bid to find which is perfect for stock trading but I am here to boldly say that “if you have preferred one to the other, you might be making a big trading mistake: fundamental helps you uncover the safest sectors and stocks to buy while technical drills down to the right time to buy”.

Let’s take CCNN – Cement Company of Northern Nigeria as an example. We have already done our analysis of the company’s financial positions using key metrics like profitability, liquidity, stability and rated the share a good buy, but did you know that, in the midst of the buy rating, you could buy at N21 and see the price fall to N15? The reason is simple, the price might have skyrocketed to the peak, buyers were already exhausted and if the volume of purchases is not strong again, investors will start taking profit by selling their holdings. Technical analysis lets you check the status of the market direction, so you wouldn’t lose out on entry.

I am not saying that CCNN will fall but the short term correction is something you need to watch before buying your next share in the company, except you are investing for a long term. Even, in long-term, you still can’t rule out the importance of technical analysis because you can apply it to the daily, weekly and monthly chart.

Why do we need to analyze stock technically before buying?

  • It tells you whether the market is going up or down
  • It tells you whether the trend (up or down) is strong or weak.
  • It also tells whether the market is about to reverse to the other side; if it is going up, you get to know when it is about to change to the downside and vice versa.

Here, I will be sharing my personal combination of tools to trade profitably in Nigerian stock market using a secret finance blog. I only reveal this website to my subscribers in my exclusive trading club.

The first step to take when analyzing stocks for a perfect buy and sell time is to locate the key levels. Key levels are share price regions where a lot of buying and selling activities takes place. Buyers struggle to keep price going up and sellers were able to take over, or sellers dragged price to a region they couldn’t sustain then buyer push the price upward.

I always watch these key levels on every stock before deciding on the perfect time to enter. Let’s take a look at the chart below for better insights:

best time to buy nigerian stocks

The yellow line labelled “A” is the upper key level known as resistance; it is that region price increases to before reversing. At least you can see how price reached the key level “A” twice before eventually breaking out. The same applies to “B” which we call support, the share price touched that region twice too before going up. My advice is this “When you see regions share prices approached several times before reversing, that region is referred to as the key levels.

The key levels are very important as that’s where buy opportunity surfaces if the price had been going down and close to key level “B”, it signals the potential of reversal to the upside. But, you might be at a risk of losing part of your portfolio value if you buy at a region close to key level A as price reversal to the downside is likely.

The next technical tool I explore is directional movement index, this tool never fails as it accurately reveals the general market trend instantly. I don’t need to interpret the chart or do the analysis but on display of three signal lines – strength, bull and bear, I already know what investors’ sentiments are.

Let’s take a look at directional movement index:

best time to buy nigerian stocks

The directional movement index is the graph that contains, red, blue and black signal line. The blue represents an upward trend, the red is for downward trend while the black is the strength of the trend.

Here is how to interpret the graph and take trade decisions:

  • When the blue and black line are trending up and above the red line, it signals a strong and bullish trend; the share price is going up as indicated by the yellow lines tagged “1” & “3”.
  • When the red and black lines are trending up and above the blue line, it signals a strong bearish market; the share price is going down as indicated by the yellow line “2”.
  • What if the blue and red lines are above the black line? it means that the share price is consolidating, that is no up and down market, just in a straight line. I have seen this play out several times on some company’s share, the price is neither going up nor coming down until a major news is released. In such situation, watch out for a breakout soon.

This pattern had once emerged on Cement Company of Northern Nigeria shares before it broke out and went to a new higher.

Look at the regions painted yellow on the chart below: the blue and red lines were above the black line, and price consolidated (no up, no down move) until the black line crossed the red line to sign a major upside.

best time to buy nigerian stocks

I really can’t stress how powerful this tool is as it had helped me find the perfect time to buy.

So, if you refer to my fundamental analysis of CCNN stock, I can now conclude that the crossing of the black line above the red line signals the entry of new buyers and eventually price went from N16.20k to N20 in 2 weeks representing 62% return.

Please note that the ADX indicator is not 100% accurate, In my book, you will learn how I use it with three other leading indicators to confirm my buy or sell signal.

Do really think this is a great idea on the best time to buy Nigerian stocks? Please share your suggestions.

How To Easily Pick Best Performing Nigerian Stocks Today

How To Pick Best Performing Stocks In Nigeria Today – Learn How I Pick Top Sector Stocks To Buy & Make Money More Trading Shares Online.

This trading strategy is a continuation of my previous guide on how to know which sector stocks to buy now. In that practical and well thought-out tips, I shared the number one economic indicator to watch before deciding on the sectors to focus on. The reason you must start your trading decision this way is that “the performance of the company you buy into is largely driven by the overall sector trend and government policies”. When government decisions favor an industry, it tends to attract more investment from big investors as they channel their funds to companies that will likely receive a boost.

Take, for instance, firms in the building material industry have been grappling with cash flow challenges, rising cost of operation and mounting debt level due to dwindling government revenue that had affected their ability to finance long-term capital projects. If you are an investor looking for sectors to stay away from, this is one of them as the general industry growth may be unimpressive.

But, a rising oil price in the past few months to $60 (above $45 benchmark) provided more revenue for the government to increase her spending on capital projects. From the 2018 budget, the sum of N300 billion was earmarked for road construction and rehabilitation, so expect building materials and cement companies to pick up as abandoned projects will be revisited and more projects awarded. For instance, take Dangote Cement, the company’s share (as at when I checked) is already up by 17.39% since the start of the year (2018), Larfage Africa, Northern Nigerian Cement, CAP Nigeria have also gained 17%, 85%, and 14% respectively.

This is a perfect example of how to uncover stocks that will deliver a great return on your investment; start from the overall macro indicator by following the global Oil market as shared here, then focus on sectors that will benefit from the trend and find great stocks in that sector. This doesn’t mean that all stocks in a top sector will perform well, some companies may still lag but your core focus is on buying the biggest winners.

Here are steps I have always follow strictly to find the best-performing stocks in the best sector.

Focus on the top sector indexes.

As at when I posted the guide, here are the top sectors with most gain:

  • Banking index – up by 24% YTD
  • Industrial Goods index – up by 21% YTD
  • Insurance Index – up by 13% YTD

Source: NSE

See – How to find the best sector to invest.

When you begin your stock selection processes like this, you have automatically increased your chance of finding companies that will deliver a superior return. Like I always say, the performance of a stock is largely determined by the sector group and investors’ perception about growth in that industry based on general economic policies.

Find the best stocks

My next move is to look for stocks that are driving the sector as it’s not all the companies that make up the index will deliver the biggest return. From the three sectors listed above, let’s find the top performing stock in industrial goods:

I check the list of companies that make up the industrial goods sector on NSE market indices to screen out companies that have increased more in share price more than the index on year to date (YTD).

My top pick was CCNN – Cement Company of Northern Nigeria., a building material manufacturing, and marketing company focused on the Northern part of the country.

This company is currently up by 105.26% and 95% since the start of the year and in the last one month. What an outstanding return you will hardly come by if you didn’t start from sector performance.

Here is a screenshot of CCNN stocks as highlighted in yellow:

Best Performing Nigerian Stocks

Did you know that you have bypassed so many complex mathematical calculations like discounted cash flow or financial ratio analysis to arrive at the type of stock everyone is looking for?

Check Fundamentals

If I invest in CCNN stock, it wouldn’t have been a bad idea but just that my trading decision would be half-baked, why? I need to validate the stock by checking few details about the financials of the company.

Best Performing Nigerian Stocks

First, I look at profitability like current quarterly sales and earnings and be sure that the company is performing better than their previous result:

In the latest nine-month financial report, CCNN reported a revenue of N13.62b compared to N9.2b reported in 2016 representing 48% growth. EPS in the same period grew by 184% ( from 50k to 162k). Net profit margin increased to 14% from 7%

On the quarterly basis, sales, and profit also growth by 88% and 1499% respectively while net profit margin, an indicator of profit earned per sale rose from 2% in third quarter 2016 to 19% in the comparable period.

Here is a snapshot of CCNN third quarter result in 2017:

Best Performing Nigerian Stocks

Shareholders fund were adequately utilized as return on equity stood at 15% in the current period from 6.2% in 2016.

Second, I look at the liquidity position of CCNN. The company is able to finance its short-term obligations as it has a positive current ratio of 1.76, higher than the previous year. I also love the impressive increase cash flow of N1billion from operative activities; they generate more cash from their business.

Best Performing Nigerian Stocks

The third area is to look at how exposed CCNN is to long-term debt? Here, I focus on the long-term debt to equity ratio of the company to know if they are highly leveraged or not. A company that has more debt to equity will likely channel their profit to interest on long-term loans or resort to a right issue which will affect earnings per share, investor’s favorite metric.

Best Performing Nigerian Stocks

 

From the result above, you will see that the company was able to manage its debt down to N2.7b from N3bn, no wonder debt to equity for the 9 months period was 20%, down from 26% level in 2016.

If all the major fundamentals of Cement Company of Northern Nigeria looks great, with the building materials industry projected to grow this year, ( as the government plans to spend over N300billion on infrastructure and road rehabilitation in 2018) tell me why I shouldn’t buy into such company’s share? Besides, the region the firm covers is an area that is ravaged by constant militant attacks and as so the government plans to rebuild the northern part of the country, the company should be among major players in such rehabilitation projects.

CCNN as of this writing trades at N16 per share, the stock is a potential pick for short to medium term gain.

If you had invested N100,000 early this year in CCNN, by now, your cash should have doubled to N215,000. I bought this stock last 2 years, and have already made 3X my cash which is far better than fixed deposit or treasury bills.

Like I said, you don’t need any complex formula to find the best performing Nigerian stocks, what I have shared here is enough to help you screen and pick good stocks to buy.

See – How to pick profitable penny stocks in Nigerian stock market

Do you know good stocks in a top sector? please share your picks, an idea could help an investor invest rightly.

How To Know Which Sector Stocks To Invest Right Now

How To Know Which Nigerian Stocks To Buy & Sell Now – Learn How To Analyse Nigerian Economy Using Oil Price, Forecast The Best Performing Sector Index Perfectly.

Whether you are buying shares for a long term or short term, the simple truth is you may not be profitable if you don’t take your time to analyze and understand the economic factors that affect the future prospect of your investment; forget what your stockbroker is saying, use your intuition to find one or two pieces of evidence to support your decisions.

For me, I always look at the economic trend and cycle we are currently in as that alone tells me which sectors of the economy is the best to invest in. I had an investment chat with a friend and shared a very simple and practical revelation as thus: “if you want to know which industries smart investors are putting their money, follow Oil prices and the factors affecting global production cut”. As at 2016-2017, OPEC and non-OPEC members held a meeting to have an agreed global production quota, a move that cushioned oil glut. That factor alone reversed the bearish Oil market to the other side (currently trading at $60, from a low of $40), This is a clear boom for Nigerian economy as the revenue from sales of crude output is driving the CBN reserve to a pre-crisis high of $40billion.

What does this mean for a smart investor? Focus on the sector that was badly hit by the previous falling prices and will likely benefit from a recovery.

Let’s discuss the effect of Oil prices on Nigeria economy and how it affects your stock performance using the 2016-2017 trend.

When Oil is down due to excess global output from US shale productions, rising inventory level, and increasing supply from non-OPEC members, countries that depend on the commodity tends to suffer from dwindling revenue and as such tightens their belt. Nigeria was badly hit by the falling revenue and that threatens the external reserve to low ($23b), the CBN at that point couldn’t sell more US dollars to banks for import finances which affected the availability of the greenback to the extent that SMEs resorted to buying dollars at a higher exchange rate from alternative markets. Ordinarily, when you incur more cost, it will definitely affect your button line (profit). The increased material input cost had an adverse effect on the overall consumer goods industries as operational cost skyrocketed.

The industrial good segment of the economy consisting of construction and heavy equipment companies also had their share of the bite as capital expenditure (CAPEX) was affected by fall in government revenue. CAPEX is a term used to describe capital expenditure of the government that drives infrastructural development.

What happened to the banking sector? when you look at a bank’s financials (specifically, the asset side), you will notice that a major percentage of bank’s loan and advances is exposed to the oil and maritime sector. A fall in oil price will likely affect the sustenance of loan repayment from companies in these sectors, as they grapple with dwindling revenue from oil sales.

According to CBN prudential guideline, banks are expected to provide for the loan whose recoverable value may fall below the actuals otherwise known as an underperforming loan. Provision for underperforming loans affects the profitability of banks too. When you run a check on the financials of some banks in 2016-2017, you will see the impressive top-line performance but an alarming provision that slowed down profit.

Even consumer had to tighten their personal spendings as prices of outputs went northside as producers look to pass on the extra cost of importing at a higher exchange rate.

I can go on to explain more effects of falling oil prices on different sectors but I think the information shared so far is enough to let you see the reasons Oil is a major driver of the Nigerian economy.

As Oil Recovers, What Next…

Let me share a chart of the recent recovering that started in the 2-3rd quarter, 2017 and show you how the rising price is helping the economy recover:

how to know which stocks to buyNotice the reversal that started in 2016 but showed a clear uptrend in May-July 2017, this was an after effect of the several OPEC meeting with non-members on the best oil output level to maintain, a decision that excluded Nigeria, Libya and eventually led to a positive GDP growth in 2017 to make Nigerian’s exit from recession. The Nigeria stock market index began to recover and ended the year as one of the best index performers with NSE ASI up by 42%.

Let’s take a look at the NSE ASI chart to confirm the positive correlation between Oil price and the index:

how to know which stocks to buy

From the chart above, you discovered that both NSE index and Oil have repetitive trend patterns; the stock market fell and picked up, at the same period(May-July 2017) Oil price started its uptrend, to hit the 2014 high at 43,000 basis point. So, I haven’t just shared stories but also proved that the key driver of the Nigerian economy is oil and if you are looking for which Nigeria stocks to buy, always check the economic cycle. The boom period is characterized by rising oil price and bullish stock market while the recession period is the reversed.

Which Stocks Should I Buy Now As Oil Price Moves To A Higher Level?

Here are top 3 sector stocks to buy now and their revenue drivers:

  • Banking stocks – this stock will enjoy reduced loan loss provision to oil sectors as oil price maintain a bullish trend. One of their profit boosters will mostly come from an increased net interest income.
  • Consumer goods stocks – this sector will likely experience reduced material input costs from the stable exchange rate, hence drive operational profit.
  • Industrial goods sector – An increase in oil price leads to more revenue from oil sales, hence drives government spending on major infrastructural. I see cash flows available for heavy equipment and industrial companies.

That’s all for now. I think you are well informed on how to know which Nigerian stocks to buy and sell right now. Like I shared earlier, focus on Oil and you will always find the next big opportunity.

See – How to pick the best stocks to trade for maximum profit.

How To Always Know Top Sectors Big Investors Are Putting Money

Best Sectors To Buy Shares & Invest In Nigeria – Part 1 – Learn How To Trade Shares Online, Find Top Performing Sector Index – NSE Banking, Industrial, Oil & Gas, Insurance Index.

I always tell small traders who are just entering the stock market not to focus fast rising shares but invest in sectors with most liquidity. This is very vital because liquidity drives price and makes it easy for you to buy and sell your shares faster when the need arises. In my early days of trading, I never knew the importance of liquidity until I offered to sell my shares in an insurance company but was unable to do so; my broker would take my order to the market on opening hours and come back to tell me that there was no bid, only offers (everyone wanted to sell), then I started asking why I couldn’t sell my stock in the market and realised that only a few traders buy and sell the shares daily. I checked the stock market section of BusinessDay Newspaper to see the volume of transactions traded daily and discovered that it would take a while to find buyers because the stock was underperforming; no one was ready to buy into an ailing company.

That one mistake from that made me focus on shares that were heavily traded in millions per day so that when I compare my  XX, XXX units orders with what is exchanging hands it will be easy to find buyers. 

See – How I Started Trading Stocks Online With 3 Investing Principles

In this investing guide, I will be sharing my simple steps to uncover sectors investors are currently trading millions of shares week on week. The investors I am referring to are not retail investors but foreign institutional investors, mutual funds, investment managers, pension fund administrators, insurance companies and banks. These guys trade millions of shares and when they buy, you will see the ripple effect on the price of your shares and when it’s time to sell quickly, you really do not have issues liquidating your investments as they are readily available to bid; only if they see that the company had a solid growth record.

So how then will I know where they are putting more money in so that I can capitalize on that, buy into such stocks and sell back to them when it appreciates by 10-15% in 5-10 days of trading? Here is my simple guide to do that:

  • Go to Nigeria stock exchange website and look through the weekly report section – 

    The NSE Weekly Market Report presents a summary of all activities relating to securities trading on The NSE’s market. It includes a detailed summary of securities traded in the week under review, company-specific financials, corporate actions and other announcements.

  • Click on the latest report for the week and locate the index movement. The stock market is categorized into different sectors which represent a group of listed equities in similar industries or similar line of businesses. each of the categories is represented under banking, consumer goods, industrial, insurance, and oil & gas. 
  • Find sectors that are recording best positive performance on a year to date (YTD), quarter to date (QTD) and month to date (MTD). These are the sectors big investors are actively putting their money into.  As at when we posted this guide, the NSE banking index (an index that tracks the performance of all listed banks) recorded 21.89% on it’s YTD, QTD, and MTD column, followed by NSE Industrial Index and NSE oil and gas to record 15% and 14% respectively.  This means that top investors are putting more money into the banking sector, no wonder the sector has more traded volume. On the other hand, the consumer sector at similar period has the least volume interest.
  • The final step is to locate top performing companies in these sectors and buy into them. 

You may be wondering, why do I need to pay attention to liquidity in the stock market? The first reason is to avoid being stuck when you need to sell and the second is take advantage of high volume transactions that can drive prices higher in a bullish market. These top investors have invested so much in hiring the best analyst, and trend watchers, so they have more information about every sector than you do. If you see more fund managers, insurance companies, banks, pension managers gradually moving their fund into a particular sector, it will reflect in the shares trading volume and prices (industry index). But, the downside risk is that you could also experience sharp price fall in a bearish market too.

While this is not 100% foolproof, I still believe it will help you find the best sector stocks institutional investors are currently paying more attention to.

See – How I Pick Best Performing Stocks To Buy