Investors and the psychology of earnings seasons    

Sola Oni, an integrated communications strategist, Chartered Stockbroker and Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications. You can reach him at onisola2000@yahoo.com

The first quarter of the year is always characterized by the announcements of audited financial results by the quoted companies on Nigerian Exchange Group PLC (NGX PLC). One of the key drivers of an efficient market is the availability of authentic and regular information from quoted companies. It is a Post Listing Requirement that a listed company must submit quarterly and annual financial statements to the Exchange for immediate broadcast to all the Dealing Members.  The immediate announcement is to prevent insider abuse where someone can take advantage of privileged information for purchase or sale of stocks. The Exchange imposes sanctions on any quoted company that flouts the Post Listing Requirements.

As part of its investor protection policy, last week, the Securities and Exchange Commission (SEC), announced a new filing system for quoted companies. According to the SEC, unaudited fourth quarter financial statements should be filed within 30 days after the quarter has ended and the annual audited financial statement within 90 days after the year ended. An investor whose investment objective is income, invests a huge percentage of his money in stocks of companies with a track record of robust dividend payment. This is unlike speculators who invest primarily for capital appreciation. A speculator can buy stocks in the morning and sell in the afternoon.

We are now in the earnings season on NGX. Audited financial statements of the quoted companies across various sectors have been pouring in with announcement of dividend and date of annual general meetings. A leading manufacturer of rigid foams and other household materials, Vitafoam Nigeria PLC, has announced a whopping net profit of N4.38 billion for the year ended September 30, 2021, compared to N3.46 billion in September, 2020.  The company, whose annual general meeting is scheduled for 4th March 2022 has proposed a dividend of N1.50 per ordinary share as against its previous 70 Kobo, an increase of 114 percent over the previous one.  Guinness Nigeria PLC, Meyer PLC, Airtel Africa PLC, Nestle Nigeria PLC, MTN Nigeria Communications PLC, and PZ Cussons PLC have also announced results.

Total Energy Marketing Nigeria PLC grew its profit before tax by 759 percent to N24.99 billion, in 2021, its revenue increased to N341.17 billion from N204.72 billion. Conoil posted a profit before tax of N3.79 billion last year, as against N2.15 billion in 2020, while its revenue hit N126.69 billion from N117.47 billion. MRS Oil Nigeria PLC posted a profit before income tax of N114.75 million, as against N2.26 billion in 2020 and recorded revenue of N71.98 billion from N41.98 billion. But Eterna PLC announced a loss before tax of N647.93 million last year as against a profit after tax of N702.46 million in 2020.

The stock market ended green in January on NGX as investors earned N2.04 capital gains, an average year-to-date return of 9.15 percent. The bullish rally tends to validate the concept of the January effect when stock markets are expected to enjoy a bullish run due to a number of variables.

But the concept has become a subject of debate as well. Risk averse investors channel their money to fixed deposit, mutual fund, and fixed income securities such as bonds, while those with high risk appetite take position on blue chips. At the basic level, equity investment generates capital gain, dividend and bonus shares. The psychology of equity investors at the moment is to purchase shares of companies that have proposed high dividends, and dump  the shares of those that are unable to reward shareholders. It all bothers on portfolio rebalancing. Dividend is after all an income.

Equity investment provides an opportunity for portfolio diversification as an investor can own stocks in different sectors of the economy. It is easy to liquidate, especially through the secondary market. There are large, mid and small capital equity funds, depending on the investor’s investment objective and quantum of funds for investment. There are multi capital equity funds, thematic equity funds, whereby mutual funds invest in specific sectors such as banking, pharmaceuticals and IT. There are balanced funds where part of the money is invested in stocks and others in debt instruments and the equity linked savings scheme, which provides investors tax savings.

Market pundits have always maintained that returns on equity is higher than fixed income in the final analysis. The yields on some stocks on NGX are above 10 percent, implying that they rank higher than yields on fixed income securities. Many of such stocks are currently trading below their intrinsic value on NGX. The rate at which investors scout for profitable stocks was demonstrated recently with the oversubscription of MTN Nigeria’s Offer  for Subscription by 139.47 percent. Some of the key factors that will impact the stock market in Nigeria in 2022 are alignment of monetary and fiscal policy, implementation of 2022 budget, especially, the issue of budget deficit financing, rising inflation, another round of Naira devaluation and handling of petroleum subsidy, among others. Investment in a diversified portfolio of stocks is an excellent way to hedge against inflation. This can be achieved by investing in index funds and mutual trusts. In a period of rising inflation, investing in individual stocks requires sound investment advice of a stockbroker as a risk management technique.