Volatility is in the air, no doubt and this is not really a term you should be scared of. This year, penny stocks are taking the lead among the best-performing stocks in the Nigerian stock market.
I ran a scan of top stocks that have not only outperformed the NSE ASI index negative of return of -4% but have also helped shareholders who keyed in January 2021 pocket over 50% return on their investment between then and now, June 2021, guess what? Here is the list of stocks on my screen.
- Seplat, up by 74% to N700
- Guinness, up by 52.62% to N29
- Champion Brewery, up by 144.19% to N2.1
- Vitafoam, up by 58.97% to N12
- Chiplc, up by 103.13% to 65 kobo
- Mbenefit, up by 51.85% to 41 kobo
- Royalex, up by 136.6% to 52 kobo
- Morison, up by 177.55% to N1.36
- Regence Alliance, up by 136.36% to 52 kobo
Out of the 9 listed stocks on the move, 6 are penny stocks while the rest are large-cap stocks.
Please note that price alone isn’t enough when it comes to picking the next breakout stock, I give more weight to strong financials which has always been the catalyst to breathe new life into NSB ready-made stock.
One of the stocks that had just breakout from the penny stock zone into a mid-cap category is Vitafoam.
Vitafoam Nigeria Plc manufactures foam products in Nigeria. The company makes and sells mattresses, pillows, sponges, carpet underlays, mats, foam blocks, and other foam products. This stock was once sold for N3-N4 in January 2020 but had since blasted higher to N12,4 (market close as of today), which is like 250 to 350% share price appreciation.
The big question is, what could have been the catalyst behind this explosive return, when is the best time to buy the consumer good stocks?
Let’s quickly look at the fundamentals of Vitafoam in its previous financial year, up to the recent quarterly reports.
FY 2020 financials, the company reported:
- an increase in revenue to N23.4 billion (from N22.2 billion in 2019), 5.4%
- a reduction in the cost of sales which pushed gross profit to N11 billion (from N8.7 billion in 2019).
- a 45% increase in operating profit to N6.4 billion (compared to N4.4 billion in 2019).
- double-digit growth of 78% in profit after tax to N4.1 billion (from N2.3 billion in 2019)
- significant growth of 67.5% on earnings attributable to shareholders to 305kobo, from 182kobo.
- a positive and expansion in its cash flow from N5.1b in 2019 to N5.2 billion.
- a 100% increase in borrowing from N1.2 billion to N2.4 but the coverage ratio of 6.9x and positive cash flow are positive indications that Vitafoam can service its debt without refinancing its loan or issuing corporate securities.
- an increase in ROE to 45% from 38% in the previous comparable year.
Q1, 2021 financials, Vitafoam also:
- declared a profit of N1.11 billion against N819 million, that’s a 35% growth.
- generated revenue of N8.6 billion, up from N5.9 billion in the previous quarter.
- grew its EPS to 80kobo, from 60kobo, up by 33%
Q2, 2021 financials, the company continued its path to delivering impressive result:
- revenue for the quarter increased to N10.6 billion (from N6.4 billion) pushing its 6-month figure to N18.6 billion, 56% above N11.9 billion generated in the previous half-year.
- operating profit expanded significantly to N2.14 billion (from N1.3 billion) with 6-month figure printing at N3.7 billion, 37% above N2.7 billion reported in the previous half-year.
- profit after tax also hit the billion Naira mark, N1.4 billion against N809 million, 73% growth. This pushed the half-year profit to a historic high of N2.48 billion against N1.69 billion earned in 2019, which represents 46.7%.
- EPS up by 66% compared to the previous half-year figure – from 130.45kobo to 217.44 kobos.
Let’s also look at the trailing twelve-month performance against the previous financial year:
- EPS is 364 kobo, compared to 305kobo.
- Gross margin is 38.14%
- Operating margin is 23.9%
- Net margin is 13.89%
- Return on Equity is 51.08%
Using a risk-adjusted discount of 25% on its EPS (TTM) of 305kobo, Vitafoam stock should be fairly valued at N14.56, which’s like 17.4% above the market price of N12.4.
And if the company continue to deliver impressive double-digit growth till year-end, say a modest 50% over its FY 2020 EPS of 305kobo to N4.57, then we’d be looking at N18.28 to N20 market price (47% upside potential) by the end of 2021.
I hope you see the key reason Vitafoam stock has been soaring to new highs.
Vitafoam is up by 90% and 51.1% in the last 6 and 3 months respectively. The stock is currently 2x its average volume with over 19 million unit already exchanging hands in two (2) days, that’s huge!
With the 20-day average still above the 50-day, Vitafoam stock is in a strong short-term, so it’s a seller’s market right now.
While the stock’s PE ratio of 3.33 looks cheap relative to an average earnings growth of 50%+, I think the stock is yet to tick my most important checklist which is TIMING – Vitafoam looks like one that’s overbought right, the share price is already trading above the upper Bollinger band of N12, which means that a sharp pullback is imminent.
A continued uptrend at this point will surely be driven by FEAR OF MISSING OUT (FOMO). This emotion is so powerful that it may push and keep the stock at overbought levels for long.
But I’d rather wait for the stock to come down. Once it becomes technically oversold and set for a bigger bounce to my estimated fair value, I will add to NSB ready-made stocks for the year But right now, I can’t take the risk at the top of the market.
Disclaimer: I don’t own Vitafoam but following this stock keenly for another buying opportunity.