This strategy highlights another way you can still make money from Nigeria stock market.
One of the biggest challenges of a beginner in the stock market is “how to pick the first stock and become profitable“. I receive related questions like this from beginners and amateur traders who are finding it extremely hard to select good stocks with upside potential.
Today, I will be exposing you to a big money-making system – you can adopt in the new year and beyond – that can add more figures to your current portfolio, no complex financial ratio analysis – you only need to wait for earning seasons every three months, do a quick market scan and pick a few stocks that are gaining momentum on big volume.
The idea is what I call Turnaround stocks – these are companies that have fallen out of favour, stumbled badly, whether because of bad management decision or outside events but are staging a bigger comeback and trade at a cheaper price than their projected earnings. Another way to look at turnaround stocks is their previous financial performance; they have been reporting losses in previous quarters but had justed released impressive results in their latest quarter, hence changing investors sentiments and expectations, sometimes you would see analyst upgrade their ratings from sell to buy.
In spotting stocks like this, due diligence is highly required as some companies that were believed to be on track to profitability could fall back to their previous loss position. With this in mind, I always probe the reason a company had just declared a profit and if such could be a one time proceed from asset sales or a result of a strategic move that will continue to impact future earnings.
A solid reason you should embrace this stock investing strategy is that the returns could be big for investors who choose well – Some investors have made 50%, 100%……250% or more from such stock.
Some of the turnaround stocks we’ve had in the past were Cadbury, and UACN – These stocks lost their momentum as a result of weak financial performance but eventually turned around after a major restructuring. From this scenario, we can deduce that most turnaround starts with board restructuring, new management decision, then government policies or economic events.
How can one spot good turnaround stocks?
Like I said earlier, you can either keep track of stocks investors are dumping until they bottom out or have a system that alerts you immediately a stock shows a sign of reversal. While the first option can be tedious as no one knows when a reversal is in sight, the second option employs stock screener to scan for companies that have declared their first quarterly profit after a series of previous losses.
To help us find potential turnaround stocks, we will pick four (4) criteria:
- EPS (FY) – We want to see Earnings Per Share in the Previous Year to be less than 0. This automatically displays all the companies that reported a loss in their 12 months period.
- EPS (TTM) – We also want to see Earnings Per Share for last four (4) quarters in the negative territory (less than 0); this means that the companies are not posting profits for at least the previous four quarters.
- EPS (MRQ) – This is where the turning point starts; EPS (MRQ) implies Earnings Per Share in the most recent quarter. We want to screen for companies that had just reported their first quarterly profit. This may vary; some might have held an impressive run with history of quarterly profit, but for whatever reason (economic events or policies) fell into the negative territory and now seeing their first profit or it could the company’s first profit since inception.
The EPS (MRQ) should be above 0.1 – a quarterly profit tells you that the company is on its way to a full year’s profit.
The final search criterion is to look at the monthly performance.
- Monthly Performance – This is optional but to an extent it lets you measure investors sentiment towards the companies because such could validate your assumptions. The idea is straight forward; if the next quarterly result is expected to be impressive, there is a solid chance the share price should increase after earning announcement and will continue to surge higher in coming months.
When I applied this screener to our local stock market, the result showed two stocks:
- Cornerstone Insurance – The stock declared a loss of 23kobo in 2018 financial year. Right now, its loss per share in the previous four quarters is 4k while its recent quarterly result indicates a profit of 16kobo. The stock is up by 129.63% and 16.98% in the last 3 and 1 month respectively.
- Royal Exchange Insurance – This insurance provider just declared an impressive quarterly result of 11kobo per share which is far high than its previous full year’s loss per share of 3kobo and trailing 12 months loss of 7kobo. With a share price of 28.57% and 35% in 1 and 3-months period, Royal Exchange plc is no doubt another example of turnaround stocks to watch.
In trading turnaround stocks, it is best to buy earlier than the big volume traders or else, you might end up buying at the top of the roof. Technical analysis of price is highly required to avoid buying high and selling low.