How I pick the right stock to invest in on the NSE

image: sporadicpieces.wordpress.com

I hope you like the picture above. Well, I love it! It depicts the exact state I'm in: surfing the Nigerian Stock Market wave.

Since 2008, the Nigerian Stock Market has been a tumultuous wave, wiping out investors and crashing portfolios. I lost all my savings too in 2008, but mine was a sadder case. I bought into the First Inland Bank public offer at N9.50 and they didn't send me a share certificate, I went to the Registrars and they couldn't locate my name in the records. My investment was gone forever, even if the market goes bullish again and the share prices double the pre-crash period, I stand to gain nothing. I was better off falling for those ponzi scams, the very ones I diligently avoided by buying shares myself.

But I took it as a challenge and armed myself with finance and investment knowledge, reading over 10 books by finance professors and investment gurus. I came back, I saw and I won back all my loses. And now I'm just surfing the waves.

So how do I pick winning stocks?
In Nigeria, with the desert like state of the NSE; picking the right stock is extremely easy. And I will show you how. 

1. Get a Punch Newspaper.
Yeah, you heard me right. Get a Punch Newspaper. Turn to the NSE price list page, and write out all the stocks that traded over a 100,000 units that day. Then get 4 other Punch Newspapers, each for an entirely different month.  Do the same thing for each. Now write out all the stocks that appeared in all your lists.
The reason for this is you wouldn't want to be the big guy, the one moving the stock prices by your quotes. You would want to buy into companies that are very active on the NSE, companies with very liquid stocks, companies you can buy into or sell out of within a day and without causing a tsunami.



2. Get their 5 years Annual Reports
If you've been reading investment books or foreign blogs, you'll think 10 years is the ideal number. Well, you'll need to contact an Investment firm to get the 10 years annual reports of any Nigerian company, you won't find them online. So that's why I use 5 years.

You can get recent Annual reports on my Slideshare Account

3. Do some Analyses
Now that you have the Annual Reports, you have to do some quick analysis to vet the list you have. You'll be crossing out all companies that have not grown Revenue year on year by at least 15%. 
Then you'll proceed to crossing out companies that have not grown profit year on year by at least 15% You'll also cross out companies that have not grown Earning per Share year on year by at least 10%
You'll also cross out companies that have Return on equity of less than 10%

Why? You might ask.
Nigerian economy has been growing at over 6% Even terribly run companies in Nigeria have benefited greatly from this growth and manage to produce good looking annual reports.
The Money Market will provide you about 12% rate of return on your money, and sort of risk free too.
And if you are the patient type, you can get 15% buying Nigerian Government bonds (well, if you are not like me, I avoid any dealings with the government and wouldn't even rent my house to a government official).

The only way the trouble of investing in NSE can be worth it is if you stick with my recommendations. There will be companies that will meet the strict requirements, Nigeria's economy is booming.

4. Vet the Income Statement, Balance Sheet Statement, Cash Flow Statements and Notes.
By now you'll be down to a couple of companies, usually less than 10. 
For this process, you will need some knowledge of corporate finance and accounting.
I use the data in the Balance sheet to rewrite the Income statement, the Profit and Loss statement. Then I use the data in the cash flow and notes to determine if there was any creative accounting done, the type of accounting I hate.

This stage is the most critical, I have lost money in Oando because I didn't do this stage then. I simply swallowed the numbers in the annual report, I didn't know how to vet them. I later went for an online accounting and finance course, read all the books I could find/afford. Now I don't fall for creative accounting anymore, if you're feeding your growth with loans I will cross you out (I sold my shares in a company recently because they were doing so). 

In the end, the few stocks that will make it through will be just the ones worth your investment.

5. Buy at the right price.
Now that you've identified the stocks to invest in, what's left is to buy now or wait for the right time. And in the current state of the NSE, this is one decision you'll find very hard to get wrong. 

I use a crude DCF calculation to determine the intrinsic price of the stocks that made it this far, and I apply a margin of safety that is very flexible. I will be explaining more on this part of stock investment later on in my Investment series. But a quick check is to not buy a stock that is selling at about 20 P/E ratio in Nigeria. You'll be paying an exorbitant price for the growth component.

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