simple stock sense

[paragon]

hi all,
i would like this thread to be a place where we share simple strategies on hoe to analyse companies for better knowledge in investment.

Below is a write up on foreign investors and how they affect us as investors.
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In a developing country like Nigeria, there’s no doubt that the influx of foreign investments and expatriates is inevitable. Be it for business or pleasure, the benefits accruable from these foreign bodies are mutually beneficial in the long run.

In the Nigerian stock market, companies are not left out as foreign investors have continually pumped in huge amounts of money- be it as working capital or otherwise- into Nigerian companies to help boost service rendered and profitability as well.

The big question however that investors like you and I ought to ask ourselves is this- Is this money invested in the form of “debt” or “equity”? The answer to a large extent justifies or should justify if investing in a company that has received such leverage is viable or not.

“Debt” or “Equity”

These two terms are a form of leverage in business that is very vital to the profitability of a company. We will cover them in detail in subsequent articles but let’s briefly define them.

“Debt” is a form of loan taken which is repayable over a period of time but with interest. The interest here can be called the cost of obtaining the loan.

“Equity” on the other hand with respect to this write-up refers to selling an ownership interest in a business in exchange for some amount of invested funds/ money.

[paragon]

this is the concluding part.

The Gist

Now, if you read or hear of an investment of say N20 billion by a syndicate or consortium of foreign banks in XYZ bank plc, try to find out if the money invested was in form of “debt” or “equity”.

If it is invested in form of debt, it means that XYZ plc is going to convert some of its yearly profits into servicing that particular loan for a period of time. Well, this on its own is not bad, but it becomes bad for shareholders when the debt profile of a company is on the high side. This reduces the amount to be paid as dividends on one hand or it reduces the amount the company has in its reserves in the medium to long term. This definitely would lead to stock depreciation over time.

On the other hand, if the instrument is in the form of “equity”, it means that the shareholding structure of the company would be diluted as time goes by.

This means that assuming the company was 100% owned by Nigerians, ( board members, staff and investors alike), it ceases to be so upon such an investment. The company investing takes up a certain percentage of ownership in turn for the money invested.

Most times, such an investment takes the form of preference stocks for some reasons. When a company becomes diluted, it means large outstanding shares and most likely small dividends if profitability cannot be increased to match such change.

A vivid example

In April of 2007, a consortium of five international financial institutions invested N20.25 billion in Intercontinental Bank plc. The money was meant for implementation of strategic growth plans which in the long run implies more profits.

Also, the money was invested in the form of convertible preferred equity. Convertible preferred equity simply means stocks that have the right to be converted to common stock.

Assuming they are converted at the rate of N20.00, this implies that the bank has an additional 1 billion units of shares. Hmm…

Conclusion

Both debt and equity investment are good but check to make sure that the company is making good profits and also taking deliberate efforts to reduce the debt profile. Always do your mathematics before reacting to company news.

Think and Act…

[c kenneths]

In a nutshell, your advice is for us to invest more in companies that has their foreign investment in form of equity as against debt?

[olusolakemmy]

Hey, every
i think foreign investment in the form of equity is better , even from the content of the analysis.
I also think that often a time companies run into financial crisis and they need a loan to get out of it, which if succesful, they will bounce back to productivity, and some might want to go into new project or expansion,they can also go for loan. That means it is also important to know what exactlythe investment will be used for.
However, if someone invest inorder to have a substancial opinion in a company, he must have analysed the circumstances and condition of the company and deem it worthy to be invested in.

[olusolakemmy]

Hey, every
i think foreign investment in the form of equity is better , even from the content of the analysis.
I also think that often a time companies run into financial crisis and they need a loan to get out of it, which if succesful, they will bounce back to productivity, and some might want to go into new project or expansion,they can also go for loan. That means it is also important to know what exactlythe investment will be used for.
However, if someone invest inorder to have a substancial opinion in a company, he must have analysed the circumstances and condition of the company and deem it worthy to be invested in.

[paragon]

hi all,
since the exchange in Nigeria is very volatile, i believe this will help.


Trading in a volatile market

No doubt, the Nigerian stock market is a very volatile one as the swings that characterizes the market rightly suggests. This being the case, what then do we as intelligent investors that we call ourselves do? A volatile market is inevitable as there will always be profit takers in the short term that will induce this effect. Lets read on and see if we can truly absorb this trend, and profit from it in one way or another.

What is volatility?
Volatility is a statistical measure of the tendency of a market or security to rise or fall sharply within a short period of time. It can be measured by the standard deviation of the return of san investment.

A wide price fluctuations and heavy trading characterize volatile markets. They often result from an imbalance of trade orders in one direction. Some people attribute this trend to things like company news, a recommendation from an analyst, a popular initial public offering. Others say it is due to day traders, short sellers and institutional investors.

Its clear that there is no consensus on what causes volatility, but what is clear is that investors must develop ways to deal with it.

Stay invested
One way to deal with volatility is to avoid it altogether. This means staying invested and not paying attention to the short-term fluctuations. Sometimes this can be harder than it sounds- watching your portfolio take o 50% hit in a bear market is more than many can take.

One common misconception about a buy and hold strategy is that holding a stock for 20 years is what will make you money. Long term investing requires homework because markets are driven by corporate fundamentals. If you find a company with a strong balance sheet and consistent earnings, the short-term fluctuations won’t affect the long-term value of the company. Infact, periods of volatility could be a great time to buy if you believe a company is good for the long term.

Important information

Volatile markets are associated with high volumes of trading, which may cause delays in execution. These high volumes may also cause executions to occur at prices that are significantly different from the market price quoted at the time the order was entered. We as investors should always ask brokers to buy at a fixed price to maximize returns.

Also, the type of order you choose is very important when the markets ae in a swing. A market order will always be executed, but in fast markets you might be surprised at what price you get the shares.

Here, a limit order should be placed with the broker like we said above, to buy or sell at a predetermined price. Limit orders typically cost more that market orders but are always a good idea to use because the price at which you will purchase or sell securities is set

Conclusion
Investors need to be aware of the potential risks during times of volatility. Choosing to stay invested can be a great option if you’re confident in your strategy. If however, you decide to trade during volatility, be aware of how the market conditions will affect your trade.

[windywendy]

Originally Posted by olusolakemmy

Hey, every
i think foreign investment in the form of equity is better , even from the content of the analysis.
I also think that often a time companies run into financial crisis and they need a loan to get out of it, which if succesful, they will bounce back to productivity, and some might want to go into new project or expansion,they can also go for loan. That means it is also important to know what exactlythe investment will be used for.
However, if someone invest inorder to have a substancial opinion in a company, he must have analysed the circumstances and condition of the company and deem it worthy to be invested in.

It depends on the type of debt we're talking about and also on the debt level. If the debt is convertible debt -- i.e. is convertible to equity, then that's not too good because once the conversion to equity takes place, EPS will become diluted, the number of shares outstanding increases and this will impact negatively on the share price. Again, if the level of debt to equity is high, then there's the risk of liquidity crisis -- first of all, such a company will have a heavy debt burden and rewards to shareholders will be mediocre. As you can imagine, the share price will also have a mediocre performance.

However, a reasonable amount of debt, especially if it's not convertible to equity -- is good because the debt is tax-free and the additional cash generated from the use of such debt can increase returns to shareholders.

[dotunk]

i think funds that are gotten from these guys and turned into equity is most desirable, cos the way i see it, its just like buying stocks in a company via the stockbroker/stockmarket...from the outstanding authorised shares of the company.

The difference here is only that the shares that will be bought by these foreign investors may have to be created to accomodate that and that means dilution of the shares as Windywendy said.

But if this translates to higher PAT, then the drop in equity price will be counteracted and price may actualy rise.

Debt to equity to me is like you are being enslaved... stock with your creditor (not a nice position). it showes that the company cant repay the debt "and begged to have it converted to equity".


i think this happened to a company on the exchange... am not sure now but i think it was AP plc(amnot sure).

[eriksbmw]

My 2 kobo is this........you must put in time and do real qualitative research.

My stockbrokers ( considered one of the best in the market ! ) leave a lot to be desired and most times cannot explain in detail why I should by a particular stock....

Consequently I have to invest a number of sleepless nights in trolling the net for info. on companies and market strategies.......in the end you'll find that with clear-cut objectives you can call all the shots yourself.

Typically I study the historical trends of stocks coupled with government policies and market trends/news items......while its not an exact science I haven't faired too badly.

[dotunk]

eriksbmw

Typically I study the historical trends of stocks coupled with government policies and market trends/news items......while its not an exact science I haven't faired too badly.

thats exactly what we are talking about. you know i know stock broker are now scared of investors...especially when you tell them what they dont know or what they dont expect to hear from you! same goesfor doctor!

[paragon]

hey guys,

Transcorp is acquiring some serious undervalued assets in Nigeria. They just got the Port Hacourt refinery. I think we had better looking at the company for future purposes.

What y'all think?

[Stockmarket_Voyeur]

Definitely. Read about that some days ago (research, research, research) and already asked my stockbroker to get me some.

[SpecNomics]

But this had always been one of the selling points of Transcorp in their Public Offer i.e. Refinery, Oil Bloc, NITEL, Hilton, etc, or am I wrong! So why the renewed enthusiasm for old information?

Question, how much would it cost to get the Refinery to full capacity? what is full capacity? What are the Margins? would they be getting Crude at below International Market? Would there be a cap on how much they can sell end products? or was OBJ waiting till he got his own refinery before he pushed through deregulation!

Only joking with the last point, though.

We all know the Bulls are running the NSE, "stupid money" I would not say so, but hopefully the NSE does not turn out to be a China Shop!!!

[c kenneths]

Let it turn out to be a chin shop, we are ready to learn lessons from the crash, or how many has NYSE had, and there are still people buying shares there.

On Transcorp, by the time you wait to see the result of their acqisitions and its performance, you may be late to the party.

If all those questions are investigated and answered before each buy decision is made, then it will take months to make a single purchase.

[dotunk]

transcorp transcorp.

me i dont hae confidence in the company. i think i need to be convinced i should put my money there.

i was all for this company before and during the IPO, but what has been happening to the company and the price has been discouraging.

[paragon]

@ specnomics,
its been a while since i last saw your post. Or did you volunteer for peace keeping missions in Iraq.

Well,its nice to have you back.Lets keep the ideas coming.