When you buy the stock of a company, how do know if you are actually trading or investing? This is a big question everyone looking to profit from the stock market should answer before placing their next trade.
Investing isn’t the same as trading. This a fact that had helped me build a separate stock market portfolio. When a stock goes down or up in 10, 20 or 30 days on a row, I don’t touch my equity investment portfolio rather I buy more units to increase my annual ROI as long as the fundamentals of the company remain intact but if the same suffix on my trading portfolio, I make sure a sell order is immediately triggered to cut my loss (as long as the stock falls below my acceptable support level.)
Trading, on the other hand, involves buy and selling of stocks frequently for capital appreciation. The goal is to generate returns that beat the NSE all-share index. You profit from stock market trading when you master the art of buying at a lower price and selling at a higher price within a short period – which could be in days, weeks or months.
Last week, I ran a check on some of my stock market trainee’s account, only to discover that they didn’t know why they bought a company’s stock, that’s why they can’t control their emotion on a slight share price fall.
How do you know if a stock is good for investing?
Since investing is a buy and hold strategy, it means the stock I buy should possess the qualities of a great business with solid fundamentals like:
- Consistent year on year growth in sales/revenue, profit and cash flow.
- Competitive advantage from brand monopoly, innovation or high switching cost. A company that meets these criteria should post an average net profit margin of at least 10% in the last 3-5 years.
- Conservative debt and high-interest cover.
- Must be undervalued relative to its market price.
- Consistent in paying a dividend for at least 7 – 10 years.
More so, if a stock must meet my criteria for trading, it has to possess the qualities of a momentum stock like:
- High relative strength; the stock performance relative to the market index in the last 6 months.
- Solid growth in sales and earnings above 10% and 15% on a quarterly basis.
- Share price must be up by at least 15-20% in the last 1 year.
- Trade above its key averages like 50, 100 and 200 to confirm short term bull.
- High volume stock.
Let’s look at one of the listed stocks in the Nigeria market:
Is GTB stock good for trading or investing?
- Does it have a high relative strength? While the NSE all-share index is up by 21.7% in the last 6 months (from 20,979 basis point to 25,533 basis point), GTB stock has appreciated from N18.01 to N25, that’s like 38%. So the banking stock passed.
- Does it have solid growth in sales and earnings on a quarterly basis? Although, the bank reported a decline in both PBT and PAT it still beat analyst expectation amidst Covid-19 pandemic. The bank has the lowest cost of fund in the industry. When you also consider the downward review of savings deposit, GTB should report higher figure in Q3. The banking stock here is neutral.
- Is the price trading above its key averages like 50, 100 and 200? Yes. The banking stock passed.
- Is GTB a high volume stock? Yes. The banking stock passed.
In summary, GTB stock is good for trading.
Does it mean I can’t invest in the bank’s stock? Let’s look at the criteria for stock investing:
- Consistent year on year growth in sales/revenue, profit and cash flow.:
While the bank has been growing its interest income and net income consistently, it hasn’t been generating more cash from its operation in the last 4-5 years. The bank’s free cash flow is down by 59%
Is the downtrend in free cash flow a strong backup to GTB’s bearish outlook in the last 3-4 years amidst rising net income figure? Well, I can’t say but investors’ pay attention to a company’s cash flow position year on year.
- Valuation: Using a risk-adjusted discount of 20% on its EPS (TTM) of 6.8, the bank’stock is fairly priced at N34 which is 36% above its market price of N25.
- On dividend, the bank is one of the top dividend aristocrats as it has consistently declared a dividend in the last 7-10 years.
To answer our initial question on whether GTB is good for trading or investing, I think the bank’s stock is good for long term investment if you want dividend income. For capital appreciation, only hold for a short term of between 3-6 months.