- Ola Emmanuel
In this series on investment opportunities and wealth creation in 2008, let us examine about 20 factors that influence stocks market price movements so that those who are ready to play in the market can get to understand or refresh their minds on issues that determine the directions (yields or losses) on investments in the capital market.
To explain this issue, I will draw your attention to the market performances of some stocks in the recent past. In 2006, Okomu Oil (Agric/Agro Allied Sector) ended the year on a market price of N34.05. However, the stock recorded the highest price of N40 while the lowest was N16.80. Dunlop ended the year 2006 on all-time high price of N4.16 but not after the stock price had dipped to as low as N1.94 during the year. Cadbury stock price hit the peak at N70 while it ended the year 2006 at N32.46. In year 2007, a stock like Afroil was as low as 33k but rose to peak at N9.19; while in Printing and Publishing sub-sector, Academy Press was N1.56 at a point in year 2007 but also rallied to record N6.82 high. All these price flagellations are as a result of several factors which are clearly understood by few investors but with greater percentage of the market investors – especially budding ones – are at the dark of.
Pre-AGM & Post-AGM Surges: the general behaviour of the price of a stock is that it embarks on upward swing (rising) when the annual general meeting of the company approaches. Information would have reached the market about what the company wants to give as rewards (bonus/dividend) to its shareholders. Therefore before the close of the company register, many investors may want to partake of the supposed good rewards. With increased demand, the price goes up. In this wise, it is often the case that the market price of a stock attains its highest in the year by the date the company register is closed few days before the AGM.
The marking down of the market price for value of the dividend (and/or bonus) given makes the price to take the first plunge. Closely following this is the possible supplies of the stock to the market for sale after the AGM by those investors who believe they need to divest to enable them reposition their stock holding. This glut will further make the stock price to fall.
Influence of Core Investors: a savvy investor will be interested in who the core investors are in the company he wants to put his money. For instance, investors may be favourably disposed to taking positions in such companies where foreign and local investors are core investors compared to companies where about 80% of the total shareholding is in the hands of an individual investor or are in the hands of members of a single family. Therefore, it is not unlikely that a company perceived to be in the grip of one or two individuals may not enjoy investor confidence – more so if the core investors lack good track record. I shall continue treating the factors in the week to come.
Don’t Waste This Year:
The excuse of majority is that they don’t know anything about investment in stocks therefore they are not interested in the market. What a great money-making opportunity escaping them! You don’t need to master the market before you can begin to enjoy the wealth the platform offers. While learning about the market, you can get someone to serve as your investment advisor or portfolio manager to handle your investments on your behalf (and in your name, please). Such an appointed portfolio manager will take off your shoulders the troubles of investment decisions or stocks analyses by handling this for you. Also, the person can serve you as personal investment coach. If you are able to adopt this approach, though you may not yet become savvy player in the market, yet you are able to get best returns on your investments.
Pre-Public Offer Price Rally: Success is about how intelligence is put to use. Because some people are privileged to know what is about to happen, they make use of this intelligence to their advantage. This is what happen in the stock market when the market insiders get to know ahead of the public that certain company ‘will soon come to the primary market’ to raise money. In a bid to take full advantage of the discounts such the public offers will offer and the good returns such stocks will give, investors’ demand for such stocks will increase thereby making the market price to go up appreciably before technical suspension is imposed on the stock price. Such investors with privileged information would have good capital appreciation by the reason that a public offer is on the way.
Sector Viability: Why are investors falling over themselves to invest in banking sector stocks and such sector that deal in everyday basic need is closing down due to lack of patronage? I am talking about the textile sector. Why is it that investors are not keen on the textile sector and the companies in the industry are closing down despite the fact that they are so important to the economy of a nation? What makes Japaul stock riding so high to record over 100 per cent capital appreciation within few weeks? The fact that companies operating in viable sectors are trusted to make good profits is a key factor in getting investors’ confidence and patronage. Japaul is a lone player in the maritime sector and inasmuch as oil exploration has not stopped in Nigeria’s onshore and offshore, Japaul will continue to be in business, making good returns and enjoying investors’ confidence. So also will be the most-active sector (banking) who, notwithstanding how high the average market price in the sector is, the stocks with lowest market prices in the sector will be regarded as penny stocks – and continue to give benefits penny stocks offer to investors.
Institutional Investors:
Call them the market catalysts, the Institutional investors have the funds to change the course of action on a particular stock. We have seen the impact of this on the Nigerian Stock Exchange growth when the Pension Reform Act brought much fund into the market. Institutional investors are group of shareholders with big fund to play with (pension funds, mutual funds, investment clubs, fund management firms). Like I wrote earlier, their interests in particular stocks are weighty enough to make stock prices rise – or fall. Institutional investors’ preference for a particular stock can transform the fortune of a stock to make it become a hotcake in the market. Likewise, divesting from a stock is significant enough to make a once-viable and performing stock to nose-dive in price movements. Therefore, institutional investors’ level of ownership is a key factor investors cannot and should not overlook.
The Company Financials:
As the case usually is, investors respond to the results released by quoted companies. Thus, a 3-month result, half-year result or 9-month result is sufficient to convince savvy investors what will be the fortune of such a company at the end of the financial period. Therefore, it is not unlikely that a stock will record high volumes of trading activities when these results (gross income, profit before tax and profit after tax) hit the market.
Share of Ownership Held By Employees:
A move could be made by a company to directly ask its members of staff to buy the company shares – especially if such a company is newly coming to the stock market. This is a way to motivate the staff members to work harder and better with the consciousness that they are all owners of the said company. This can be in form of private placement, initial public offer subscription or staff association investing in the name of the association on behalf of all members. Where the above is the case, the commitment of such employee-shareholders will be different from that of employees working to earn salary alone.
An investor therefore, needs to find out as much as possible a company policy on employee shareholding, the percentage of employees that respond positively to the gesture, and what their level of shareholding is. An investor needs to ask: are the company employees eager to buy into the company or they are less enthusiastic about it?
Knowing fully well that the middle level and senior management team of a company have access to privileged information about a company, and they own shares of the company reveals a lot that can be considered good intelligence for investors to take positions in such a stock. This information goes a long way to attest to confidence level the stock enjoys.
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hen on a particular day a stock emerged as the most active in terms of volume traded, a savvy investor would want to know the number of deals that gave rise to such performance, and the direction of the stock’s market price – whether it appreciates or it drops. This information is so important to an experienced investor so that he can take a well-informed decision. The position of an investor on a supposedly-active stock will be different where, for instance, the high volume occurs in just one or two deals and it passed from one major investor to another (while the market price remain constant); or it is an institutional investor that divest from the stock by supplying the market with a huge volume and the market price ended up dropping. This is a different scenario compared to a supposedly-active stock where quite a higher number of deals and volume was recorded and the price shoots up. The described three (3) scenarios above convey varied information to a savvy investor which enables him apply his investible funds in such a way to attract maximum yield. But there are ways even new investors too can enjoy this scarce information.
Increased Primary Market Activities:
If there are increased activities in the primary market, the secondary market activities will slow down. For several companies to embark on private placements (usually done by yet-to-quoted companies) or initial public offers (done by companies who are newly listed on the Stock Exchange) or public offers (a way in which quoted companies approach the public to raise more money as occasion demands), many investors are forced to sell their secondary market holdings to enable them realign their investment portfolios by taking advantage the primary market offers. One of the privileges the primary market offers to investors is the relatively lower pricing of stocks. A public offers (POs) is usually sold at a discount while initial public offers (IPOs) or private placements (PPs) are often sold below the real market value of such stocks. The willingness of secondary market investors, in this instance, to sell their stocks brings about much supply that enforces the slowing down of the secondary market or a flat or downward trend in price direction. A case in mind is the general lull the stock market went through in the middle of 2007.
Public Bias:
There is an adage that says, “a man greatly loved by the masses never do any wrong”. So it is with a quoted stock or handful of stocks that are enjoying market stakeholders’ goodwill. This goodwill may be as a result of likeness for a personality or two that are owners in the company. Who can remember where Afroil was two years ago? Compare this information with the market value of Afroil today and you will perfectly understand my gist. I try to reflect on the performance of Afroil in the Petroleum Marketing sub-sector prior to the taking-over by the new investors. In those years, one was pressed hard to declare: “Can anything good come out of this Bethlehem?” But look at Afroil today: a beautiful bride in the petroleum marketing sector that brings much delight to its investors. Afroil market price was 43 kobo as at December 31, 2005; but as at last week Friday (February 1, 2008), Afroil market price opened at N17.05 and closed at N17.74 thus gaining 84 kobo that day. What a marvellous goodwill and a way to reward investors with good price appreciation.
Influence of Company’s Management – AP Plc as a Case Study:
The most visible here is the managing director. Who is he or she? What is his or her track record in business management? Who is the chairman of the company? Is he or she a savvy business manager? Is he or she so respected in the business circle? How influential? These information form part of what savvy investors are always looking for before they put their money in any equity. A case so fundamental to this is that of AP Plc stock, one of the stocks in the petroleum marketing company. We all know the fortune of AP Plc prior to the taking over by new investors that brought in Otedola into the helm of affairs. December 31, 2004, AP Plc market price was N69. In that year 2004, the stock recorded all-time year high of N84.50 and all time low price of N42.87 with Earning per Share of 4.11. In 2005, AP Plc was among the top losers in market price with the price dropping to N35.82 (December 31, 2005). This is 33% loss compared to the N69 recorded in 2004. The year 2006 ended for AP Plc with the stock recording marginal price appreciation by rising to N46.29 (29 per cent price increase over that of 2005 year-end).
The year 2006 brought a new life into AP Plc when new core investor bought in thus paving way for new management team. As at the time of writing, AP Plc stock market price is N260 as at Friday last week. If a chart is plotted to show the performance of this stock for the period 2004 to date, it will undoubtedly be an interesting one.
Creation Of Artificial Scarcity:
A deliberate attempt can be made to mop up supplies to the market of a particular stock. Inasmuch as the stock is hard to come by, demand will continue to drive up market price. There are several reasons that can motivate this. An investor who wants to become a core investor may position himself to be acquiring shares of a particular company. In this wise, the instruction the broker or group of brokers are working on is to daily buy every unit of the stock that comes up for sale. Also an investor may want to increase his shareholding in a company to enable him become a significant factor. Let us say the investor’s shareholding is less than one per cent of the total shares, he may come up with a goal to increase his shareholding over a period (say 3 years) either direct holding or an indirect holding.
Keep enjoying investing with calculated risk taking. If you are not yet well-grounded in this aspect, then you need an investment advisor.
Festival-Induced Market Glut:
Because of needs for money to celebrate special seasons, investors do supply the part of their stock holdings to the market in order to raise money to celebrate with. Thus market prices of stock may stagnate or fall during these major festive seasons (Christmas, Ileya, Easter, etc). Also when students are going back to school especially at the beginning of a season when school fees are to be paid, investors do push much stocks into the market for sale.
Closely related to this is the effect of summer holidays abroad which many investors in Nigeria are presently embracing. This may largely explain the market behaviours for some seasons now when the market tends to dip between July and September. A glut in the market generates low pricing and when demands cannot match supplies, there is a lull which may lead to a plunge in prices of stocks if left unchecked through increased demands.
Government Trade Policies & Toothless Enforcement:
How viable a sector will be will be determined largely by the government economic policies since there is no investor who would want his money to be tied down in an unprofitable business. Why is the banking sector (and of late, insurance) the most active sub-sector in the capital market? It is due to the fact that investors had come to realize that all Nigerian banks are churning out profits and every year they are paying dividends. Since investors know that these finance institutions are good money – whether real or imaginary – and that dividends are assured, the confidence to invest in these finance institutions will generate higher demand (above supply) that will bring about capital appreciation (market price increase).
For some weeks now, I have being a guest on one of the TV stations in Lagos to look at the 2008 budget. Last week Monday’s edition was dedicated to the Textile Industry; with a view to unraveling the mystery surrounding the total collapse of the sector dedicated to meeting a basic human need. The questions is, “why are Nigerian textile companies dying despite the fact that we have over 140 million people that are daily putting on wears?” Our attempt to proffer answers led to analysis of influx of foreign materials; and how China has literally taken over the global textile market. In 2005, China embarked on aggressive exportation of textile materials. In that year alone, 5,284 Chinese firms bided to start exporting textile materials to Europe. The exercise produced 3,000 firms as winners. With the American and European countries turning them back by responding decisively to the Chinese aggression, the next destination, of course, is Africa. No wonder we have foreign textile materials all over the Nigerian markets despite the ban placed on them.
Lack of enforcement of policies and the inability of Nigerian textile companies to compete with these foreign influxes has led to the comatose of the industry and, in effect, the bad performance of the textile stocks in the Nigerian capital market. I have to stop here today.
Public Sector Money Supply:
Release of funds by the governments significantly affects the activities in the stock market. Where there is much money supply, avenue for expression is found in the market for the fund to re-create. Where this is the case, the higher demand for stocks that is not matched by corresponding supply will result in upward swing of stocks prices. Much money supply by governments into the system gives birth to more institutional investors and/or enables the existing ones to have more money to play with. Example here is the pension money paid by the government few years back which led to establishment of many pension fund administrators. The effect of this move on the activities on the floor of the Nigerian stock exchange was not lost on the watchers of the market. The stock market activities received significant boost which that enables the market grow in bounds in the past three years. When there is much money supply, investment activities in the stock market increases too.
Investors’ Reward History:
Before an investor will put his money in any stock, he is interested in how the company has been rewarding its shareholders. Is the company paying dividend every year? How much and what percentage increase? Is the company giving bonus issues? What is the record the record of the scrip issue over a period. These are some of the questions a savvy investor would want to know to enable him decide whether he should invest in the company, or not.
This series we have been considering for the past seven weeks is perched today. Continuation of issues being treated under the series will have to wait till future date.
Enjoy my Pen and stay financially fit.
OLA EMMANUEL