What To Do When Your Stock Price Continues To Fall

What To Do When Your Stock Price Continues To Fall – Learn The Best Time & Strategies To Sell Your Stock For Profit In Nigerian Stock Market

The expectations of a lot of traders are currently cut short right now as I write this guide to knowing when to hold or sell your stocks. Why? The full-year earning season is here and we had hoped for more appreciation of the share price of some selected big cap banking stocks. Besides, a friend of mine bought 500,000 combined units of two top banking stocks as he had speculated a double-digit share price increase when these companies disclose their revenue, profit and EPS figure this week. But, you know what, the reverse is actually happening: the two stocks are already down and It’s looking so strange to him.

The first bank released her financial result two days ago, great numbers, improved cost to income ratio and an impressive EPS figure, he was excited and waited patiently for the stock to run up on market opening but was clearly disappointed as the stock declined by 2% before market close and already down by 7% in the last 2 days. Another was a great popular and most profitable bank, in terms of return on equity, they released their full-year result today with market-beating numbers, but the same trend followed. Right now, both banking stocks are falling sharply and he is asking if he should just sell off to protect his current portfolio value?

I also own shares in one of these banks but no panic, not because I am too confident or don’t lose money but I had already subject myself to a sniper trading strategy that delivers 80-90% winning rate if I hold my portfolio for 3-6 months and that alone, is the discipline that keeps me going on in the stock market.

But, this my friend is already panicking because the red flag on his account is driving him to just sell off. Here is how I helped him regain his foot and confidence which I think will help you know what to do when your stock continues to fall:

  • Check whether there is a company-specific news or policy announcement? Sometimes, when you see a massive sell-off, it could be a result of breaking news about the company, government policies or inter-market effect. Inter-market occurs when stocks fall in response to other global equity sell-offs just like we saw in the 2008 market crash. But if none of these reasons is there and the stock is falling continuously, that is most like a profit-taking activity, you don’t have to panic.
  • Did the fundamentals of your stock change? As long as the company you had bought reported great numbers and still on a growth path, remain calm. In the stock market, the price is only a reflection of emotions and if it falls out of fear, buy more, eventually, the value of the company in the future will determine what investors will pay. A stock has delivered good results and now it’s falling, don’t you think, the expectations are already priced in and you bought at the peak of the trend? why not wait for the next quarterly results? earning expectations is stronger than the result itself. When a company that had posted impressive numbers, is about to release its next quarterly or full-year result, expectations always drive the share price.
  • Locate a key support level. The sell-off you are seeing is a temporary market activity and as existing holders take profit, there are still firm believers of fundamentals who will not sell but hold on to the stock, why not find a key support level price had touched previously before a retracement. Let me use the chart of a banking stock to explain this:

Continue reading What To Do When Your Stock Price Continues To Fall

How Long Should I Hold My Stock As a Short Term Trader

How To Make Real Money Trading Nigerian Stocks – If You Want To Make Real Profit Consistently Here Is a Strategies To Adopt & Apply Today.

One fear you would definitely need to overcome if you want to be a confident trader in the stock market is “selling too quickly to cut your loss” because the market is going faster in an opposite direction. This was a big issue for me. I analyzed a stock, checked all fundamentals about the company but the moment I bought the stock, a new emotion sets in, this emotion eroded all that I stood on to enter the trade, the next fearful question was, oh! this stock is going down, should I sell now, after all, half bread is better than losing all?

Several times. I had picked great stocks with all fundamentals intact but because of impatient, I couldn’t wait to see my expected return materialize, immediately price swings to the south several times and to the north, it becomes an issue.

Let me share an experience in 2016 when I bought Okomu Oil stock. The palm oil stock had a 100% + impressive run in the last 2014/15, the same period the NSE all share index fell more than 10%. a key driver of the company’s profit is the exchange rate gain from palm oil export.

I did a complete analysis of the stock as thus:

  • Growth & Valuation

Okomu Oil Plc had positive and increasing top-line revenue growth of 47.51% from 9.74bn to 14.36bn while net income improved 84.62% from 2.66bn to 4.91bn. Its EPS growth was also quite impressive, from N2.7 to N5.15 per share (Over 90% surge, still less than a 1-year change of 71.35%)

Okomu Oil is an agri-processing company that deals in palm oil business – Aside from the economic importance of the product, they also export to countries abroad, a model that lets the stock enjoy more value from forex transactions ( as Naira losses against the greenback, this company benefits from exchange rate gain on palm oil export). The improvement in net income and EPS signified efficiency in managing expenses while rewarding more profit on sales to shareholders. An EPS growth of 90% + compared to the 71.35% growth in share price also earned Okomu Oil a good buy as it had more room to appreciate.

  • Opportunity

Here, we looked at return on equity and debt to equity – Okomu oil has a healthy equity value driven by improved retained earning. It’s ROE grew by 37.84% while debt to equity was at 0.12 which indicateed less reliance on external debt, hence reduced interest expense and grew net income.

  • Cash Position

The cash position of a company was another important factor I looked at; what percentage of profit earned was available as cash at the bank. A great place to look at was the cash flow statement. Okomu Oil cash flow in the latest 2-3 years had been impressive, from 3.2bn to 5.95bn – this was  a key reason the company has been consistent in dividend payout to equity holders.

  • Share Price Performance :
If you had bought equity shares in Okomu Oil in 2014 at N30-N35 per share, your portfolio should be up by 40% – that’s even an additional unrealized gain – plus the dividend income receivable annually.

This was a typical analysis of Okomu Oil price – one of the best stocks to buy Nigeria then – a stable company with positive operating income, impressing profit, improving cash flow, low debt to equity and top performing stock price year-on-year.

But you know what? after I bought into this company, it was like the whole game changed completely, my emotion took over, anytime the share price dropped, I get scared and ask, should I sell this stock or wait for a rise so I can break-even?. This went on to a point Okomu oil fell by more than 30% in two weeks, I had to sell off so I could protect my portfolio. Someone that was already asking if he could sell or wait had now seen a sharp fall, what did you expect?

Take a look at the region marked “yellow”, that is the period I sold to protect my money.

The following week, Okomu Oil reversed the downtrend and quickly increased from around N40-N41 support level to hit N60 with ease, grew further to N75. Then I ask myself, how long should I hold my stock, irrespective of market news, to become a confident trader?

It was the answers to that question that had helped me hold on to different stocks for 3-6 months without fear of losing out:

Here are take away tips to survive any market sell-off:

  • Have a trading strategy like a sniper does for a hit mission- It’s only when you pick your stocks randomly that you will find it difficult to hold on to it when prices fall sharply but for stocks you picked based on a detailed, well-planned and working strategy, sell-offs are always your buy opportunity. As of this writing, a top bank has just released its full-year result which was impressive and great but the market prices didn’t move in the direction people expected, so I started receiving calls on why the bank’s stock went down, I looked at the chart on a medium-term to see what investors’ sentiment was, guess what I discovered? the stock is very bullish and is set to attract new buying volume that could push the price higher, I am already buying more units as it approaches an oversold region, where there will be no more sellers. I had already shared the tool I use for timing my entries in my new video – “Top Gaining Stocks”.
  • Make sure the stock is fundamentally sound – When a stock had risen too much, sell-off or profit taking is normal, so I really don’t get frightened when I see a stock, that has good fundamentals, falls, besides, I believe that “if you have done a good job and trust your strategy, why not buy more” at least, when the stock’s value becomes visible via its financial results, fresh buying interest will help you push the price up again.
  • What is the latest quarterly result? This is the most important of all I mentioned. A stock had just released its quarterly result which came out impressive and better than the previous quarter in a comparable period, don’t you think the sell-off you are seeing is driven by “profit takers”? That alone should let you know that it’s a normal reaction but in the longer run, the price will definitely reverse to reflect the next earnings expectations.

Back to the main question, how long should I hold onto a stock? My personal answer, at least 3 months, allow your stock to pass through a quarter, if you had done your fundamental analysis before picking the stock, then wait for earnings expectation to drive your stock after the close of the recent quarter before you consider a sell-off and if the result comes out great, you can as well ride it for the next 3 months. Seriously, this is how I trade.

So, when next you see one of your top performer’s stock price falls and the fundamentals remain the same, don’t panic again.

I hope you enjoyed these tips? find a more detailed guide in my video.

Top 3 Reasons Your Stock Prices Won’t Go Higher

How To Pick Fast Rising Nigerian Stocks To Buy Now – Learn To Avoid Low Priced Stocks & Select Top Gaining Growth Stocks In Nigerian Stock Market Today.

I had a discussion with someone (name withheld, but let’s call him Michael) who wanted to understand the reasons some shares rise faster than others. His portfolio had more “low-priced stocks” trading below N10, which he deliberately selected to take advantage of volume-driven profit; what I mean is, the stock units he owns ranged from 100,000 – 300,000, then I asked why he adopted that trading strategy, he said he believed that “someday” those shares would increase by N1 and he’ll make millions of Naira.

If you take a closer look at his expectations, they aren’t far from reality, those penny stocks might rise and earn him a minimum of N100k profit on each share. But, here is the sad reality, his portfolio return had been on the negative territory for 2 years now, the stocks, which were “randomly selected” had been down. As at when I checked his purchase price against the current market price, some stocks nosedived to less than 50k after NSE lifted the 0.50k minimum price per share restriction.

My next action plan:

I started teaching him some principles of stock market trading, one of such was understanding the key drivers of a stock price.

The truth is a stock isn’t cheap because the price is low compared to industry peers, besides, top stocks like Nestle, SEPLAT, Zenith trading for N1300, N770 and N30 per share could be cheaper than an Insurance stock that trades for 55k, you may ask how? how can I say N1300 is cheaper than 55k, isn’t that a deceit? Let me share what you don’t know, in the stock market, being cheap is not about what a share price is but it’s on how fast the company is growing compared to what investors are currently paying which is measured by its price-earning ratio.

I had once overlooked a great consumer goods stock because it sold for N15 and picked an insurance stock that sells for N1.65, you know what happened? I watch the N15 stock move faster to N34.5 in 2 months while the N1.65 was consolidating between N1.65-N1.9 until it fell to N0.75. The low-priced company didn’t beat analyst expectation when they released their first quarter result while the “high-priced” stock posted a double-digit growth in sales and profits.

I shared this experience to let you see that the price of company’s shares doesn’t determine how cheap the share is but beyond that, you need to understand the key drivers of shares and check whether they are present in the company you are buying irrespective of the market price.

Back to the discussion I initially started, I requested for a review of all the equities in Michael’s portfolio so I could share 3 cogent reasons his shares have been stagnant for a long time.

Investors perception about the sector

This is one of the biggest drivers of a company’s performance. The direction of a sector is largely driven by government policies, programme and fund support level. A company stock tends to do well if recent sectoral laws and policies will help boost local business activities, save cost or make operation performance better.

When government enact policies, as seen in the recent CBN dividend payment policy for banks, investors always interpret how companies, in the host sector, are affected. As a smart investor, it’s important for you to follow the latest sectoral news in Nigeria. A key reason the insurance sector isn’t growing as faster as its peers in other countries hinges past government policy on insurance, though few stocks are really doing well in that sector, I still tag it a cautious sector to invest in, except you follow my guide on how to pick best-performing stocks to buy now.

Here is a downside to following the latest news every day, you might not have the time or could miss a major breaking news about certain sector of the economy but you know what I do, I use the top-down strategy, I look for top-performing sector and try to find out top news that is driving the sector.

I had also shared tips on how to spot the right sector to focus and why you should never ignore the fundamentals of a sector before buying your next stock.

Company-specific news

As of this writing, Japaul Oil and Maritime Service Plc is currently attracting huge buy interest after the news of additional fund injection from Milos Global, a US-based private equity firm broke out. The stock had suffered massive sell-off last year, a dump that wasn’t unconnected to the falling oil price in the global market. This affected the servicing firm’s clients who were exposed to the crude oil market, and as they began to scale down operations, the company couldn’t recover her receivables. But now that there is a new capital injection to help Japaul Oil repair damaged vessels, diversify its revenue sources and become less reliant on oil, the share price is staging a comeback.

The company had started enjoying investors patronage after it announced a $350 million financing deal from Milost Global, a private equity firm based in New York. The chairman of Japaul Oil, Mr Paul Jegede, had disclosed that Milost will invest $250 million in equity and another $100 million in convertible loans in the company. He noted that fresh injection of capital will enable the company to fix grounded vessels, finance new contracts and expand into mining. Consequently, the sustained investors’ interest resulted in rising in the company’s share price to N0.97 from N0.63 within the week.

Source

Another example of company-specific news is that of Oando Plc. Investors are currently following the outcome of the forensic audit currently going in the company. Besides, the stock was on a bearish trend as the news of insider activities broke out.

This is a typical example of how company-specific news can drive a company’s share. A

Financial result – quarterly and annual report

This is one of the biggest drivers of a company’s share price. In the stock market, smart investors are constantly searching for companies whose fundamentals are great and if you can spot such stocks, I bet you, making a consistent profit on your investment is becomes a sure outcome. Here, I pay attention to the sales or earnings figures, operating efficiencies, profit margin, debt level and cash positions. When a company surpasses analyst expectations, investors tend to buy the stock for dividend income or price appreciations.

You can read up my complete guide on how to easily pick top-performing stocks.

I believe you now have a perfect understand of the reasons some stocks rise faster than the others, so when next you want to check or select stocks, use these to guide your choice of companies.

How To Trade Nigerian Stocks Like A Sniper

I received a mail from someone who wanted to know the hottest growth stocks to buy right now so he could invest his idle N4million and cash out in 2 months. His mail reflected his curiosity and how my response would greatly assist his choice of stocks to buy. But you know what? I disappointed him, I told him,” no stock to buy”. Why? he replied, then I said the stocks available doesn’t fit into your trading style.

A lot of stock market traders and investors lack patient when it comes to picking stocks, they really do not understand that there are perfect buying and selling opportunities. Don’t always force yourself to pick stocks rather let your trading strategy you. It’s time you began to trade like a sniper who doesn’t shot at anything but focus on a particular target. A sniper will not shot a closer or related targeted but is mandated to take on the exact person on the radar, even if there is someone in front of the target, he has been trained to wait until setup is complete.

Many traders just pick different random stocks; they lack the discipline to focus on few top-performing stocks. Anytime, a broker or someone mention stock A, you will see them rush in and you know what? they rush out too. Stock market trading doesn’t reward impatient trader with no consistent strategy, you need to exercise patience in order to survive those scary daily up and downswing.

This is how your trading style should be. There is always a targeted time to buy or enter a stock but you know what? you can’t spot it if you don’t have a trade setup. How do you know when it is time to buy your next stocks if you have not perfected or backtested your trading strategy?

To be a sniper in the stock market, you must create your own proven and tested strategy, a strategy that, when backtested, is able to spot buy or sell opportunity several times with more winning than losing. No trading strategy is perfect but if you have one that has over 70-80% winning rate, stick to it. Successful traders win and lose but you know what keeps them? they make more winning than losing besides, I already shared a strategy you should adopt on one of my investing guides, leverage on trading volume not price. A stock may rise by 10-15% and not make small investors much money but did you also know that the same little increase had made institutional traders millions of trading profits? the difference is in volume traded. These guys buy millions of shares when they trade.

Let’s use NEM Insurance, the shares gained 35k last week to close at N2.25 as at 2nd March 2018. A top trader that bought 1,000,000 units would have made N350,000 in 5 days while a smaller trader that bought 10,000 units is still waiting for the price to double or even triple because the 35k gain is only N3,500 in his account.

When a sniper takes on his target, he expects the shot to be highly profitable, hence he doesn’t target low-level personalities.The best way to start a profitable trading business as a sniper is to focus on buying in large volumes so you can take advantage of the moderate share price growth on a weekly or monthly basis. Leave the zone of small traders and trade like the big boys. I am not saying you should buy 1,000,000 units on every trade but at least focus on larger units compared to your previous volume; if you have been buying 10,000 units of 5 different shares, that’s like 50,000, why not cut the stocks and increase the unit on the best picks. You can buy 20,000 and 30,000 unit of the two top performing stocks in your portfolio.

The second strategy to trading like a sniper is to create a trading journal. Snipers have a history of successful shots and how they locate their target.

Your trading journal lets you document all your trading decisions and why you selected a stock. For instance, I bought Zenith bank at N22 because it is one of the top drivers of the bank sector index, it has good fundamentals like increasing earnings, low cost of risk and profit margin, and currently trade below its intrinsic value of N37. Technically, the stock is bullish on all indicators.

Comments on a trade like this will help you spot a winning strategy over time. What I do is to check my top performing stocks and look for a common comment I documented in my trading journal about them before again. When next you want to buy a stock, make sure the reasons you bought your best-performing stocks are also visible to increase your chance of picking the right stock that will make money.

The third strategy to trade as a sniper is patient. Snipers don’t rush into their target region, they take calculated time to perfect their shot. This is one of the biggest flaws of many traders today, they just jump into a stock because it’s one of the top gainers for the week, no due diligence or fundamental analysis. I think they actually skipped the simple valuation metrics I shared here otherwise they would wait to buy the stock at a cheaper price.

And lastly, know your exit before taking a shot. Professional snipers already have a perfect plan on how to leave or the next best exit door before hitting their target. As a stock market trader, you need to learn how to plan your exit before buying. You might enter a trade at the right time but leave at a loss because you never had a selling strategy that tells you when to pocket your profit. I already shared one of my mistakes here. Successful traders already know their profit target or the market reaction that will prompt immediate exit.

Here are investment guides that will help you become a better sniper:

A summary of these investing guide is that you just need to be patient and wait for your trade setup to complete before placing a buy order with your stockbroker.

How I Spot Profitable Growth Stocks To Buy

How To Pick Best Profitable Nigerian Growth Stocks – Learn How I Pick Fast Growing Undervalued Companies At Cheapest Price Per Share

I get so excited when I discover new stock market investment topics that will help you invest well, find good stocks to buy and become a profitable Nigerian stock trader. Today, I will be sharing interesting secrets to finding true growth stocks that will appreciate.

Let’s spend some time to find the perfect answer to this typical question, would you rather buy a stock that is selling for N5 or invest in a bigger company’s share at N500 per unit? A better way to explain this: if you have N10,000,000 to invest in stock, would you invest in Nestle stock that is already at a very high price of N1,300 per share or choose Diamond bank that is selling at just N3 per share? When I asked this question a few weeks back, the majority of the answers favoured Diamond bank shares because it’s cheaper at N3. Well, that isn’t the right way to advise a beginner on how to pick his first stock.

I had been in a situation like this, where I decided on buying stocks that were selling at a high price or go for a stock that was cheap since quantity matters too. The truth is, a stock is not considered cheap because the price per share is low neither is it expensive because it has risen too high, you need to focus on a simple metric called growth rate before picking the best stocks to buy. Nestle share price increased from N20 to N500 at some point and a lot of investors felt it was too high at that level, the same share broke through that level to hit N1000 and now at N1,300, my big question is do you still think the share is already high? Before I help you find an answer to that using my personal check, there is a number you need to understand or else, you might be misdirected if the price of the stock is the only factor you watch out for before investing. The number is the projected growth rate of a stock based the fundamentals. Smart investors were not putting more money into Nestle stocks because they were fools, they knew the company was a growth stock with great fundamentals. This is how you should think when investing in a company.

Good companies have common positive metrics before they start rising faster than their peers, you need to spot these secrets features because of one fact: they uncover companies that had shown resilience in the midst of difficult operating environments, posted impressive profit figures and recorded outstanding appreciation in share prices.

This is what I called growth stocks. A lot of investors think growth stocks are stocks that have been growing their share price, no! they are not, growth stocks are stocks that are growing sales and profit faster and at some, smart investors expect the price to reflect the actual value of the company. You can find more details on how I value Nigerian stocks before buying again. If you had thought of growth stocks as one with fast-growing price, look at Nigerian Breweries, the stock which as of this writing hasn’t posted good result but trading at approximately 31 times its earnings; price is growing faster than the profit which is a time bomb. A closer look at the chart trend reveals that institutional investors are gradually dumping the shares as it underperformed the NSE index in 2017 and already down on a look at the year to date performance.

When a stock price is growing fast and posting stead weekly gain, don’t just rush into it and get trapped, look at all the criteria that make a company stock to be referred to as a growth stock before waiting for the perfect time to buy.

How to spot growth stocks.

Here are important checks you should do before picking growth stocks:

Sectors

A true growth stock can’t thrive in a sector that is not supported by government policy, for instance, the CBN micro credit policy aimed at boosting agricultural outputs will no doubt help Agric-business access finance to scale up faster. This is a typical example of how growth stocks can emerge from policies and initiatives. We saw how the CBN’s Investors’ and Exporters’ Window provided FX liquidity, stabilized the exchange rate and reduced material input cost that were initially high due to the high cost of access forex from the alternative market.Such policy should drive consumer goods stocks that rely on imported materials as the cost of sales will likely reduce, and help improve profit figures.

You can subscribe to business dailies, follow top blogs for the latest news that could drive sectoral growth.

See – How to know which sector to focus on

Sales

This is the starting point of every growth stock pick, make sure the stock you analyse has a consistent sales growth history of at least 10-20% in the last 3-5 years. When you compare their sales revenue with the overall industry figure, it will help you check percentage market share a company currently occupies;       portrays market leader and brand loyalty.

Also, good sales figure don’t come from extraordinary or one-time business transactions but from their real line of business – operating activities.

Manage Cost

If cost is rising faster than sales, this is a clear red flag that something is wrong. True growth companies keep their operating cost under control, they have a high level of operational efficiency and can utilise available resources to produce greater results and impressive numbers. The best way to measure this is what we call “cost to sales/income” ratio, a measure of how much is incurred to produce 1 naira sales, the lower the better. I love to look at this metrics on quarter to quarter basis.

Avoid stocks that are intentionally cutting cost to manipulate profits, you will such stock when sales growth is stagnant.

Lower debt and increasing return on equity.

A true growth doesn’t channel the bulk of its earnings to finance expenses or debt servicing as they have a lower debt figure compared to their equity. Such company reports increasing return on equity above 15% year on year and can pay dividend to shareholders. As of this writing, the CBN has just released a dividend payout policy that restricts certain banks, that have a high non-performing loan and below the required capital adequacy ratio (CAR) , not to pay dividend above a certain threshold. Of all the banks listed, only 4 banks can pay dividend without restriction as they have a lower cost of risks and higher CAR.

This is a perfect example of what you should look at when picking the perfect growth stocks, the lower the debt issued, the lower the interest expense, also known as finance cost and the higher the profit attributable to shareholders and dividend payout.

The cash flow from operating activities is growing inline with or faster than the profit after tax.

It is not all the figure declared as profit are available in the bank as cash. A company may declare N10 billion Naira profit after tax but when you check their bank account, the only figure you see is N2billion, what does it mean? they are not able to convert profit to physical cash and as such might not pay dividend. This is a sign that something is wrong.

The cash flow statement is a very important financial statement you shouldn’t ignore: a company can manipulate a lot of stuff to show you big figures but at the end, it the actual cash generated from operating activities that matter.

When I check the historical cash flow trend of growth stocks, I love to see a growth percentage that is close to or greater than the net income growth or EPS growth in the same period.

For instance, if a company reports a profit after tax of N10 billion in 2017 against N5 billion PAT in 2016, that’s like 100% growth, the cash flow from operating activities in the same period should grow by at least 50%, 100% or even more.

The next check on cash flow is, what percentage of the profit declared is available as cash? using the first example, if I have N2billion available as cash when I declared N10 billion, then I have 20% cash conversion ratio. This ratio will help you see the ability of the company to raise more cash to finance growth without borrowing more.

Earnings Per Share

This is the profit attributable to shareholders in a company, besides, it is the key metrics all investors watch out for as it tells whether a company will pay a dividend or not. Most dividend payouts come from the profit after tax.

EPS is also a major factor I use to estimate the intrinsic value of a company; I divide the figure by the average yield on the 10-year FGN bond. This is the metrics I used to confirm my buy signal on Zenith bank’s stock when the bank released a Q3 EPS of N4, the estimated share price I arrived at was N38 but the stock traded at N22, presenting over 60% potential upside.

Is it all stocks that trade below estimate value are great stocks? No, do your background check to be sure that it’s only sell-offs attributed to profit taking and not a fundamental issue. What should I do when a stock trades above it’s estimated value based on its most recent EPS figure?

Know the PEG ratio (price-earnings to growth rate). 

This is a very important metrics that helps you uncover the potential of a stock. Every stock has a price-earnings ratio, a number that tells investors’ perception about a stock and the premium they are willing to pay to own that stock. Stocks with high price-earnings ratio indicates that expectations are high while a lower number tells the reverse. What if there is a way to check how fast the company is growing, compare the result with what investors’ expectation of sentiments, would you take advantage of the gap discovered and inject more cash into the stock? Here is price-earnings to growth, the light metrics that does the magic for you.

With PEG, you can easily tell whether a stock is growing faster than what investors really think or slowly which could eventually give you an idea of a future trend.

An easier way to calculate PEG ratio is to find out

  • the price-earnings multiple of a stock by dividing the share price by the current EPS figure
  • the average EPS growth in the last 3 years and use it as the projected growth rate.
  • divided the price-earnings multiple by EPSS growth rate.

Stocks with PEG less than 1 means that it is highly undervalued and above 1 indicates an overvalued stock. Proper care should be taken when projecting the EPS growth rate of a company to avoid over-estimating or under-estimating the figure. I love to use a modest EPS growth range of 15%, 20% and 25% to estimate a stock intrinsic value at various growth levels; this had helped me discovered what a stock’s value was in worst case scenarios.

Share Price Growth

When I talk about fast-growing stocks, I really do not think a stock actually qualifies to be called growth stock if the share price hasn’t performed well in the last 3 years. A modest minimum price appreciation of 50% growth in 3 years and last year is what I use to screen for top performing stocks because if all the metrics I have shared above are actually present, the performance should reflect investor’s perception or sentiments. So, before you conclude that the stock you are about to buy is a true growth stock, check how the stock had performed in previous years for better decision or else, you might miss out a key reason institutional investors or big market movers are not buying the stock.

Please read my guide on the perfect time to buy your next stock so you don’t jump into a good stock at the wrong time.

Did you find this guide on how to pick best profitable Nigerian growth stocks interesting? Please share your ideas and opinion.

How I Value Nigerian Stocks Before Buying Again

How I Value Nigerian Stocks With Earnings Per Share & 10-Year Bond Yield – This Short Term Trading Strategies Will Help You Find Undervalued Growth Stocks At Cheap Price

When it comes to stock investing, a lot of short-term traders make the mistake of buying stocks simply because the price is rising faster than the others. This method of stock trading will no doubt give you a quick return of 5-10% in a shorter time but can you absorb the downside risk? The same way the price rose faster, that is also how you will watch your portfolio lose its value faster with a bigger loss. One thing I discovered during my stock market investing journey was that just the way traders love to hold their winning stocks for a long time, they also find it difficult to sell a losing stock as they believed it will bounce back. But, you know what? this is the worst strap anyone can find himself.

This experience reminds me of how stuck I was in diamond bank’s shares, although I knew my mistake in that trade, no proper financial analysis to check whether I was buying at the peak price, after two (2) days, the stock fell by 16% but you know what? I wasn’t ready to let go due to the loss figure, it was high to let go. Anyway, I eventually sold the stock but here is the point, never buy a stock just because the price is rising, you may get trapped for a long.

This doesn’t mean that buying a fast-rising stock is bad, my point is it shouldn’t be the only reason, validate your pick first by learning how to pick the best-performing stocks, follow market news and determine their intrinsic value. I had already shared a detailed analysis of how I pick stocks to buy but the next key point is how to know what the stock is really worth. Understanding what a stock is really worth lets you to quickly see if the fast-moving price is an opportunity to buy more or stay off. The strategy isn’t 100% foolproof but it had helped me to screen stocks to avoid and wait for a pullback.

Let’s use Zenith bank, when I calculated the intrinsic value of the stock in 2017, I saw an opportunity to buy more units at N22 because the stock had an upside potential of 68%. Now, Zenith bank share is at N31.5 with another estimated 15% growth expected before I sell off. I will be sharing an analysis of this stock shortly.

See – How to analyse banking stocks

Why should one bother about the intrinsic value of a stock before buying? The simple truth is, if you take just 5-10 minutes to estimate a stock’s value, you may not be 100% accurate but it will definitely help you know which stock has more upside potential than others. There are lots of stocks that were mispriced in the market due to massive sell-off, so due diligence is required to pick which stocks are fundamentally great but technically cheap.

Another reason is that I had bought shares in a company at peak prices and it was like the market was waiting for me before it fell by 13% in 2-3days; I didn’t know the stock was already overvalued but was carried away by the straight three weekly gain recorded, now imagine that I had estimated the value of such stock and timed my entry? it would have helped me avoid the stock and wait for a pullback.

When you buy a growth stock that is selling below the estimated value, you have a higher chance of making more money in the market.

My next question is, how do I estimate a stock’s value? I am not going to bore you with complex calculations since we are not investing for a long-term, but show you how I adopt the warren buffet approach to valuing a stock using the 10-year bond yield, a formula that uncovered Zenith bank, and UBA shares, my biggest stable portfolio winners so far.

My idea of valuation as a short-term trader hinges on finding an estimated price range of stock, then compare with the actual market price and find a perfect gap to leverage on. My advice is this, avoid stocks that are 5%-10% below or above their estimated value because of a margin of safety; you are calculating an estimated value so don’t buy when what you arrived at a figure already close to the market price.

Here is how & why warren buffet uses 10-year government bond yield:

If an investor decides to leave a risk-free investment like 10-year government bond for a riskier asset, it is wise not to accept a return that is lesser so he decided to use the yield as a basis for calculating the price he would pay for the asset. The big opportunities arose when he discovered stocks that sell below their estimated value due to temporary sell-offs and market news.

Recall that I mentioned Zenith Bank shares, here is how I picked the stock: The bank had an EPS of 4.11k and will release its full-year result soon. It is expected that latest EPS figure will stand at N5, the question is how much should I pay for the bank’s share to justify an EPS of N5? using the Nigerian government bond yield figure of 13%; the rate of return on a risk-free asset, I will divide the EPS figure by this risk-free rate which gives me N38 (N5/0.13).

As at when I estimated this bank’s stock again, the market price still sits at N31per share which presents a further 15% upside potential. I had first valued the stock when it was selling for N22.

One thing you must know when valuing a stock as a short-term trader is that the yield on government bond reflects the current economic risk. The yield tends to rise when economic risks are extreme; this is evident in the average FGN bond yield in 2017; the 10-year bond yield reached a high of 18% as economic risk from falling oil prices, higher exchange rate value and rising inflation worsened. The government uses this high-level yield offers to lure local and foreign investors looking for fixed income investment opportunities.

But, as oil price surges to the north, the yield nosedived to a 4 year low of 13% as the government borrowed less from domestic lenders and issued more Eurobond at a lower rate.

The real effect of economic risk is that, when it is high, bond yield follows to compensate risk takers which eventually affect stocks value as analyst re-price their portfolio holdings.

I can even relate this to our local stocks, as the yield on long-term securities fell to a 4-year low of 13% from an all-time high of 18%, re-valuing securities using their expected EPS gives rise to a high estimated value lower than the market price.

Let’s look at the EPS figure of some selected stocks and their current market price.

EPS Figures:

How I Value Nigerian Stocks With Earnings Per Share

Using my simple method of valuing stock as a short-term trader looking for a consistent 15-25% upside potential in 1-3 months, let us look at each of the stocks’ estimated value (our current 10-year bond yield is 13%):

  • Dangote Cement: N104 (13.53/0.13)
  • GTBank: N37 (4/0.13)
  • Nigerian Breweries: N31 (4.05/0.13)
  • Zenith Bank: N39 (5.09/0.13)
  • Stanbic IBTC: N33 (4.34/0,13)
  • Wapco: N86 (11.27/0.13)
  • UBA: N17 (2.28/0.13)

Now let’s also look at the current market price of these listed equities:

How I Value Nigerian Stocks With Earnings Per Share

So what did you see from these simple metrics? For me, I see Zenith Bank, Wapco and UBA as potential picks. The reason is simple, they currently trade below their fair value when you divide their EPS figures by 10-year FGN bond yield at 13%. Please note that I didn’t say best stocks to buy, I used the term potential because one, two or all may not be the best pick as you would have to check their growth rate. A stock is cheap for a reason, so make sure the fundamentals are great before buying.

You may ask, does it mean other stocks are not a good buy? No! but I feel that buying growth stocks that trade below their fair value increases your chance of making more money than buying at a higher price per share.

How I Value Nigerian Stocks With Earnings Per Share

The year to date performance of Zenith, Wapco and UBA are 22%, 16.51% and 15.53% respectively, which isn’t a bad return in 7 weeks.

It still doesn’t mean that GTBank, Stanbic IBTC, Dangote Cements are not a good buy, but your decision to buy depends on a popular growth metrics called PEG.

PEG means price earnings to growth rate. a simple way to check whether a stock EPS growth rate in 3-years will continually support the upside potential. It also shows whether a price is far higher than what you should pay.

Let’s look at Nigerian Breweries, the share price is already at an all-time high of N128, a price-earnings ratio of 31 that reveals what investors perceptions about the stock are; they are willing to pay 31 times the current value. The question is does the company has an EPS growth to support and justify that expectation?

This next snapshot of the company’s five-year financial statement has a lot to reveal:

How I Value Nigerian Stocks With Earnings Per Share

This is the summary of the Nigerian Breweries financials from 2013-2016:

  • profit after tax fell from N43b to N28b in 3 years.
  • EPS, our main figure, also fell from N5.63 to N3.53 representing 31% decline in profit attributed to shareholders.

I really do not expect anyone to buy this stock except there was an additional information that could turn the company around, besides, a look at the weekly chart below reveals that investors have been selling their shares in the company. The company might have reported a disappointing quarterly result that led to this drastic fall.

How I Value Nigerian Stocks With Earnings Per Share

I used Nigerian Breweries stock to let you know that before buying a stock at a price higher than the fair value,  confirm that the expected growth rate outweighs the price-earnings ratio. As a rule of thumb, your price earnings to growth result shouldn’t exceed 1 if you must take the risk.

The strategy to valuing stock that I shared here works well when a company is close to releasing her full-year audited result or have already released its interim result for the half year; you can then use your intuition to estimate its full EPS figure.

On 10-year FGN bond yield, check BusinessDay Nigeria for latest figure.

See – When is the best time to buy your next stock

As of this writing, Zenith Bank, and UBA stocks are part of my equity portfolio.

How I Pick Profitable & High Dividend Paying Stocks In NSE

Highest Dividend Paying Stocks In Nigeria – Profitable Strategies To Pick & Buy The Best Nigerian Stocks For LongTerm Investments

I hope you enjoyed the detailed analysis I shared on how to pick the best banking stocks for a better portfolio performance? As of now, that investment strategy is the longest article on my blog, so don’t read it as a poem but understand how I reviewed Zenith bank’s stocks with a modest estimated value that revealed a 15% upside potential from now till March 2018.

As a continuation to the discussion I had with my friends on bank’s stock, another good guy asked, do you plan to invest for just price appreciation, or how can one find the best dividend paying stocks in Nigeria stock market? Well, that was another interesting question because a lot of stock market traders don’t have a clear idea of the opportunities in the market, they just want to enjoy price appreciation, and miss out on the residual income from dividend payouts to shareholders. I know a friend who had invested a huge sum into five (5) stable sectors stocks last year and is already expecting his first five (5) figure income this year, besides his portfolio is up by 27% as more institutional investors position themselves ahead of the full year audited report, 2017.

This post focuses on how we jointly picked the best highest dividend paying stocks in Nigeria stock market using a simple method I will be sharing right now:

See – My 6 Checklist to Pick Dividend Stocks With Double-Digit Yielding  Above CBN-Treasury Bills

Check the overall economic indicator – let Oil price guide you.

Anytime I look for stocks to pick, the first step I don’t skip is to ascertain the general economic environment using global Oil price trend. This post on how to find the best sector stocks to invest in explains everything you need to know about the effect of oil price on the Nigerian economy and opportunities in different sectors.

In summary, I said that an uptick in the price of oil helps the government generate more petrodollars which reduce overall economic risk, so expect more fund to be channelled to key sectors like industrial sector as infrastructural projects are re-visited or more capital projects embarked upon, while reserve is also boosted to help cushion the effect of exchange rate.

Continue reading How I Pick Profitable & High Dividend Paying Stocks In NSE

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