With the effect of rising inflation becoming obvious every day, I still believe that manufacturers of inelastic commodities are in for bigger returns this year and beyond.
This was the biggest driver of my decision to add Honeywell, Nascon and Nestle to my core investment holding for 2021 in my new year stock picks. While the last two picks are yet to record double-digit growth that reflects the rising demand for consumer goods, Honeywell stock has topped and surpassed my fair value estimate of N3.39 to reach a 52-weeks high of N4.2, representing a massive 250% ROI.
The stock currently sells for N3.75.
Here is the chart showing the strong U-share recovery.
Honeywell Flour Mill’s revenue has been on an upward trajectory for the past 5 years. In 2021, revenue grew by +36.23%, from N80.45bn in FY2020 to N109.59bn in FY2021, while gross profit grew by +12.69% Y-o-Y to N15.62bn despite the miller’s cost of sales rising by +41.13% during the period
A breakdown of the company’s revenue by geographical location showed that the bulk of the company’s revenue was generated in the Nigerian market. (source)
What could have been responsible for this improving fundamentals and share price appreciation? Very obvious! the company is benefiting from rising demand for its products amidst the surge in food inflation, now at 21%.
A year on year increase in this food composite index tells us that food price isn’t under control yet and as a smart investor, it makes sense to allocate a higher percentage of one’s equities portfolio to companies that are poised to enjoy higher operating margins from rising prices.
It should come as no surprise that the N100 billion revenue generated in the last financial year which doubles as the highest in the company’s 23-year of operation, is a result of Honeywell’s management strategy to offer a diversified product portfolio that meets the increasing demand for food.
How I spot stocks to buy and hold:
My technical approach to spotting great buys like this before they spike is to look for stock charts that:
- are forming a U or V shape recovery
- are in their next strong bullish cycle after 1-2 years of intense sell with a market price above the 50-day moving average.
- benefiting from one of these leading economic indicators: inflation, oil price, exchange rate, FGN bond yield, unemployment rates, Covid-19 vaccination rate, or interest rates.
The last key point is the most important of all because it has a top-down effect on the sector a company is categorized before the financials.
If you look at Honeywell stock at the beginning of the year, it did meet the three (3) criteria above before it released its FY 2020 results.
- Economic indicator: inflation
- Price appreciated by 26% and 30% in 3 and 6 months
- The market price was N1,2, above the 50-day average of N1.12
Other past winning stocks in 2021 I shared with members of the private community are SEPLAT and TOTAL (benefiting from oil).
The oil and gas stock up by 97.32% and 88.84% in the last 1 year and on a YTD while the 3 and 6 months performance are the double-digit range of 11.72% and 43.34%. This company’s topline growth is driven by oil and gas prices.
See the V shape recovery:
In the last 1 year and on a YTD basis, the downstream stock is up by 149%, and 53.2% with 6 and 3-month return printing strong at 40.28% and 37.3%.
The company is benefiting from renewed demand for petrol after the federal government eased the national lockdown last year.
See the V shape recovery on the chart:
The U or V shape strategy is a multi-year investment strategy that lets you find stocks that are about to recover from 1-2 years of intense sell-off. The strong bull on these stocks is largely influenced by institutional purchases as they expect the company to benefit from major economic shifts.
Each of the stocks mentioned above had suffered a sell-off for 1-2 years before their prices staged a big rally of up to 50% or more.
While the V shape is a sign of sharp recovery, the U shape tends to reflect some level of consolidation at the bottom before the final breakout. But whichever you find on a chart, make sure there are one or more of the leading economic indicators behind the rally.
And the next winning stocks to buy are:
1. Conoil Stock
Conoil Plc markets refined petroleum products in Nigeria. The Company also manufactures and distributes lubricants and chemicals.
As of this analysis. the downstream stock price is N22.35 with 1 year and YTD performance of 46 and 7% respectively. In the last 3 and 6 months, the stock is up by 19.52% and 18.25%, a strong signal that investors have been mopping up ahead of a bigger rally that will complete the V shape.
In its latest quarterly financials:
- Revenue grew by 18% to N67.6 from N57.5bn in the previous quarter.
- Profit before and after-tax expanded by 214% to N1.6bn and 1.1bn respectively.
- Net assets grew by 3.9% from N19.8 to N20.6
2 – Mystery Stock (Private Community Members Only)
In its recently released Q1 result:
- Revenue grew by a whopping 80% which was largely supported by a 20% increase in product sales volume (measured in metric tones)
- Gross profit also increased by 70% + despite cost pressure from inflation.
- Operating profit grew by 24%.
- Profit before and after-tax increased by 20% with zero tax expenses.
- EPS growth was 21%
Just like Honeywell stock, I anticipate the surge in the food inflation index to rub off on this stock which should help complete the U shape chart with an additional 50-100% share price appreciation in the next 6 – 12 months.
The minimum holding period for stocks that are exhibiting the V or U shape recovery is between 6 – 12 months, it’s a strategy that works for medium to long-term investors who wants to take advantage of opportunities created by emerging economic indicators.
What’s the best entry price?
I’d be sharing the best price to buy the two v and U shape stocks with members of my private Whatsapp community and if you’d like to subscribe to my stock recommendations sheet, click here.