Picking which shares to buy

This is where it starts getting hard and even tricky. Not even the professionals know for sure what stocks will do well in the future. If it was easy we’d all be millionaire stock pickers.

Sometimes, choosing which shares to buy just requires basic common sense. A few years ago, I walked into a supermarket and I noticed a new product that was doing very well, it wasn’t long before the company’s share price started to rise. Or was it when I noticed a particular brewer was doing quite well and its share price had moved up so instead I bought into one of its major suppliers and it wasn’t before its own share price followed suit. Also, if you look at the banking landscape, almost everybody has a GT Bank account and they are quite innovative, so I guess it’s easy to see how they are the most valuable bank in the country at the moment.

As such, by seeking answers to a few basic questions, it’s possible to find potential winners. Here’s some basic questions to ask about a company you’re interested in:

  • Is the company profitable? If not, is it at least increasing its revenues in a healthy way?
  • Is the company growing? (Look at its year-on-year as well as quarterly performance figures)
  • What is its dividend payment history like?
  • How volatile is its share price?
  • Does it’s current or expected earnings, justify its share price?
  • How is the company and its management viewed by investment analysts?
  • Is it in a sector you think will do well?
  • How does the company match up with its competitors?

In addition to these, a quick scan of the macro-economic environment and government policy should give you a hint on the suitability of the stock. For instance, when the Buhari government came in, they said they wanted to promote agriculture, the CBN also went on to ban the importation of things like palm oil. Those two things meant local companies in that sector would do well. And through to that, the two players there OKOMUOIL and PRESCO have more than doubled in their valuations since then.

The answers to all these and many more basic questions on profitability, liquidity, quality of management and debt profile should help you make a decision on whether or not to invest in a company.

Some of these just requires a quick look at the company’s audited financials which can be obtained from either the company’s website or from the Nigerian Stock Exchange website (www.nse.com.ng).

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