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Finance and Banking

Right Fertilizer for Investment

Peter Lynch, in his book ‘One Up on Wall Street’, discusses a time when his wife drew his attention to a great product with phenomenal marketing. Hanes was test marketing a product called L'eggs: women's pantyhose packaged in colorful plastic eggshells. Instead of selling these in department or specialty stores, Hanes put the product next to the candy bars and soda the supermarket checkouts - a brilliant idea since research showed that women frequented the supermarket about 12 times more often than the traditional outlets for pantyhose. The product was a huge success and became the second highest-selling consumer product of the 1970s. Most women at the time would have easily seen the popularity of this product, and Lynch's wife was one of them.

The product, recorded massive sales on the first few days.  Such a non-marketer doing what marketers are scared of doing would need a larger than life strategy. When I first came across this at investopedia.com, I was left wondering; does it really take an analyst, a broker, or an MBA to make it in the investment maze?  If your bet is no, you’re certainly right. 

 

In the simplest means, investing requires the simplest application of gained market knowledge and nothing more to that.

 

One rule advocated is to always look for companies with leaders that envision success and are determined to maximize shareholder wealth.  A company not to go for is one that has been massively investing in Corporate Social Responsibility (CSR). If a company is giving money to the tune of millions every year for golf sponsorships, rehabilitation centers, or Safari Rally, beware.  This is because CSR is always at the expense of company’s gains.  It therefore goes without saying that too much of it is at the expense of shareholders wealth maximization.

 

It is also important to look for great business models.  A strong stock will form a solid foundation and will most often be among the industry’s starters.  An example of a company that has formed such a moat is CFC Bank in the Financial Sector.  Over the past years, the company has divested from Corporate Banking to include Retail Banking to its services.  In addition, they have a life insurance wing (CFC Life) and a brokerage wing (CFC Financial Services).

 

Due to this great model, their share price has been on an all time high ranging between Kshs. 83 and 71.  Although the share price has gradually declined during the year, it is set to rise within the short term.  The drop in share price is likely explained by the new rights issue late last year which fundamentally leads to high demand subsequently leading to a drop in prices.  Another likely cause of this is the January Effect, which is characterized by a general drop in share prices of most stocks.

 

Below is a trend analysis of CFC’s two-month performance, which in the near future is set to gain ground.

The company that you invest in should also show the genuity of their Cash Flow Statement.  This is because many companies make an art form of disguising their true cash flow.  It will be wise to observe a company’s cash flow and ascertain that the investment is sustainable.

 

Please note that due to the nature of the market and the overreliance on technical analysts; there is a great deal of companies whose shares are over priced.  Surprisingly, every broker will tell you to buy the stock.  Burning your fingers over circumstances that could be avoided will not make you get richer any quicker.  Do a fair valuation of the company you are investing in and if you can’t understand the ratios, ask a portfolio manager or stock analyst.  African Alliance offers a good analysis of stock recommendations on a weekly basis that can guide you make a buy decision.

 

One need not own shares of all the forty-eight listed companies to strike a 100% return on investment.  Picked wisely, most stocks grow by over 20%, meaning that there is a guaranteed return out of every investment.  Such stocks could result in a substantial growth over time.  Examples of three such performing stocks in the past one-year are Kenya airways, Mumias Sugar Company and Athi River Mining.  Indeed, their performance has surpassed the bourses expectations at many trading days by far being the largest movers.

Although over diversifying can be dangerous, failure to diversify can lead to sleepless nights; especially if the share price tumbles.  It is therefore advisable that one invests in different sectors of the economy while still being careful not to overdo.  The Kenyan Market comprises of five investment segments namely: agricultural, commercial and services, finance and investments, industrial and allied, and alternative investment segments.  The Industrial and allied record the highest trade at times recording over 50% of the total market capitalization.

 

Indeed, few traders who rely on their brokers seldom make the anticipated gains.  When I first invested in the stock market not so many years ago, I gave the check to my broker and told him, “You know what to do with my money tomorrow.” That was then!  Today, I give the money to my broker and tell him, “I want you to buy for me this quantity of Shares from companies…” After all, I know my word is my bond and my research is the best hedging technique. 

 



By Michael Musau
CEO Emerging Africa Capital
Licensed by The Capital Markets Authority as Investment Advisers


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