Profitable investments guide

Access Financial Services profit has grown regularly from 2005 to 2017.

“I recently began trading stocks on both the main and junior market, and I was hoping that you could guide me through the analysis of the market and stocks and IPOs, I am not sure which stocks might likely break out on either market and my portfolio is sitting in the red for a year now,” a reader asked recently.
That is a bit tough when several stocks have delivered very good returns in 2017 with the JSE main market up more than 50 percent for the year to date and with 9 Junior Market stocks rising more than 100 percent. It is worth noting that investment is not an endeavor that will always produce quick positive results. One of the stocks in the portfolio was clearly bought at far too high a price and value. Currently, although the price has fallen it can be considered overpriced. If you were following IC you would have seen from last year that the stock was highly overvalued. Important it was the top performing Junior Market stock and there is good evidence suggesting that buying the top performing stock for a year is unlikely see that stock performing strongly in a subsequent year.

JMMB peaked in 2005 and only exceeded that price in 2017.

The number one rule in investing, get good reliable advice. Rule number 2, compare the price earnings ratios of stocks and focus on those that are the lowest and those companies that are doing well, that is, their profits are growing in a consistent manner and likely to continue that way into the future. A very good case in is that of Access Financial with a virtual increase in profit every year since listing.
Be very careful of popular stocks there may have run their course of gains and have little fuel let to go much higher.
Future earnings are important in investing, but it makes no sense to buy a stock at a high price with the hope that in a few years, profits will then grow and make a profitable investment for an investor, while one waits on the big pay day, other stocks are rising and the investor misses out on other good opportunities. Companies that are expanding can provide good investment opportunities.
Three stocks in the Jamaican market, made historical highs in 2005 and it was not been until this year, that two recovered enough to exceed the previous highs, these two are JMMB Group and Scotia Group. Mayberry Investments is the third and is well below the peak after so many years. Even as two have exceeded the 2005 highs, the gains from then to now, is not very great while many others have gone on to record considerable gains. The lesson from these three is that, while investors wait to recover losses by holding on to poorly performing assets, they are missing profitable investment opportunities elsewhere.

Stock market moves in opposite direction to interest rates.

Why is it so important to get good advice? In August a brokerage house recommended that investors sell Caribbean Cement as in their opinion it was overvalued. At the same time IC had the stock highly placed in the TOP 10 stocks to buy. The other is Berger Paints where some investors sold their stock for $10.88 only to see a big price gains since. Some persons have not factored in a number of developments in some of these companies and other developments in the wider economies, all of which can push revenues and profits. What are some of these, Cement has cut cost and likely to do so in 2018 when they refinance the current leasing arrangement. Most importantly, demand for cement is going to explode locally as demand for construction rise. The same will be happening at Berger as more buildings mean more demand for paints.
Most investors should really be investing in companies where there is a consistency in annual growth in profits. They should shun ones with a checkered earnings history, unless they can be adept of picking tops and bottoms. That is a task persons who use technical analysis can do well.
When stock prices rise much faster than the growth in profits, it is time to take serious note of what is happening as this is a telltale sign of a correction ahead unless the company is recovering from past period of undervaluation, interest rates are falling or the company is expanding and will be expected to enjoy a boost in profit as a result. Investors in such stocks should be fully conversant with what are the factors at play to ensure their investment can be properly protected if, and when, the factors change.
Look at developments in each company and what is happening to the local economy and the likely impact on companies. Most importantly, movement in interest rates have been shown to move markets in one direction or the other and this is a critical factor in investment assessment. One last point to bear in mind is the Investor’s Choice 80/20 rule.
The rule is simple but profound, only 20 percent of the stocks that end up in the top 10 in one year reenter in the subsequent year and in some years just one or none make it, while 40 percent of the 10 worst performing stocks, make it to the top 10 best performers in the subsequent year. This is backed up by data going back for several years to the 1980s. This rule is only broken in a few years that are bearish.

Teachings from silly Unilever Investors

Investors need to be careful and not follow the fad of following the leader blindly. In 2013 IC posted a report on the Unilever Caribbean based in Trinidad and traded on the country’s stock exchange.
Since the report the company stock has been on a downward slope after rising to new record in 2013, yesterday Jamaica Stock Exchange junior market listed Knutsford Express after a long period of overvaluation relative to the market, dropped $2.75 as demand for the stock evaporated. The same thing happened to Cargo Handlers that was pushed unrealistically to $30, only for it to be trading at $10 currently and is still above normal valuation. This latter stock came as a big buy on the way up, by a brokerage house.
Unilever’s profit peaked in the period to September 2014 and started a downhill ride since but investors kept on pushing the price higher until it peaked at TT$68.30 in December 2015, on Wednesday the stock traded with a loss of $1.25, to a multi year’s low of $38.

Unilever products

The IC report in 2013 was: When stock prices rise much faster than the growth in profits, we need to take time to note of what is happening. Investors in such stocks should be fully conversant with the factors at play to ensure that their investment can be properly protected if, and when, the factors change.
Unilever Caribbean stock price is up 13 percent so far in 2013, on top of a 45 percent increase in 2012, 44 percent in 2011 and 35 percent in 2010 after a 16 percent fall in 2009. The company, a subsidiary of Unilever PLC, a United Kingdom company, is based in Trinidad and manufactures a range of homecare, personal care and food products for the Caribbean region, including Jamaica, has been having reasonable profit performances for a number of years. In fact they have been able to improve sales and margins in a market that has been in recession since 2009. The growth in the stock price is well in excess of the rise in profits for the past four and half years.
Some of the company’s brands include Mistolin, Radiante, Breeze, Vaseline, Lux, Lipton, Becel and Blue Band. The product range also includes dishwashing liquids as well as fabric conditioners.

Knutsford Express peaked at $16.89 and is now trading at $12.

For the three months to March 2013, revenues climbed to $137 million up from $128 million for the same period in 2012 while profits were up to $13 million after tax compared to $11.9 million in 2012. The December quarter is the biggest period for earnings with more than a third being generated in the period. For 2012 full year to December the company reported after tax profit of $59.5 million an increase of just 2.8 percent over that earned in 2011. Profit for 2011 was up 11 percent over 2010 and 2010 profit was up 26 percent over the previous year. Lower interest rates in Trinidad have helped to push the PE ratio to 21 times earnings at a current stock price of $53.25, up from 14 times in 2011 and 11.5 for 2010.
Unilever reported areas of success reflected in good growth in some of its products but also expressed concerns about rising input cost of some of the products it manufactures as well as competition from cheaper products. From all indications, management seems to have managed to steer the operations well resulting in improved margins, which moved from 61.8 percent in 2012 first quarter to 63.8 percent in 2013, a continuation of the marked improvement seen for 2012 when the margins for the full year came out at 63.7 percent versus the 59.2 percent enjoyed in 2011.
While cost increase seems to be under control in 2013 for the first quarter, that was not the case in 2012 when selling cost rose by $17 million or 17 percent and administrative cost rose 22 percent, well above the growth in revenues. For the quarter, selling cost rose by 4.8 percent and administrative cost rose 2.7 percent while revenues are up 4.75 percent.
The company boast equity capital of $176 million, has no interest bearing debt and a high current asset ratio with liabilities almost covered twice over.
The article concluded, that the stock seems poised to rise further as demand exceeds the supply of the stock on the Trinidad market.
At the close of the market on Wednesday November 8, 2017 the stock seems poised to suffer further decline and that shows up in the chart formation.

When the market speaks

Markets have a way of telling stories that confound many. In May 2014of that year, the local market declined to reach 76,344.27 points on June 23, after reaching 86,590 points in mid-March.
Some investors thought the market was going to crash with some pulling funds out and moving into foreign exchange investments. The technical reading pointed in a different direction, the market by then had hit bottom and was not only heading up but much, much higher. One big clue, the market was caught in a triangular formation, a tell-tale sign of a big break out. The signal was very clear from September.
An article published on this site in September 2014 said “Technically, the main market is seeing the short term moving average on the verge of crossing the medium term moving average, a bullish sign. Importantly, many listed companies have posted some attractive results for 2014 that is supportive of an upward push in their stock price.” The rest is history as the market slowly crept higher to 84,084.94 and the slow recovery morphed into a strong bull market starting early in 2015.
Recently, the market has been sending out strong signals, one is that the main market is heading for the 500,000 points market, that is 60 percent away from the current level. The other signal to have emanated from the market, was the clear message that was pointing the major error the directors of Berger Paints were making in recommending the sale of shares by minority shareholders.

The stock market is sending a very strong message that a stock split is inevitable for NCB Financial by early 2018.

The market sent the message but some investors did not listen resulting in the surrender of 6.6 million units at a vastly reduced value to its true valuation. It is not surprising that the stock now trades at $15
At an investors’ briefing this year, the NCB Financial Group’s executives said they saw no benefit to the company of a stock split. IC had written a piece indicating that a split is baked into the price already and could not be avoided. On Friday and Monday, the market sent and even clearer message to the directors that it cannot be delayed with the stock price jumping record $108 with only small amounts being offered for sale.

Stocks on verge of a breakout – 2014

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Stock markets can be like tsunamis, the change in the current is not seen as it moves out of site until it’s time for all to see what’s been happening. That is one reason investors are often advised to invest in stocks with good prospects long term.
There is no certainty when markets will move in one direction or another. Since profit drives stock prices, one only has to wait on the pay day from growing companies, which will surely come. What does this have to do with the local stock market? Many investors wrote off any chance that the local market would have any recovery after the spring decline of 2014 that saw the All Jamaica Composite Index falling to 76,344.27, coming against the strong demand for foreign exchange, not aware of the market’s history.
A critical point, investors in local stocks should note, is that the best times to start buying stocks is during the summer months. The Jamaican stock market bottoms and starts to move upwards in more summers than at any other time in its history, this goes back to the start of the creation of the market index, back in the early 1970s. For 2014, prices on the Jamaica stock market declined a bit from its earlier 2014 high, with several stocks hitting 52 weeks’ lows into the early summer months, with the main market hitting a low on June 23 and the junior market on August 4.
2014 developments| The average person may look to changes in the market indices to guide them in what is happening in the market. And yet others will wait until the news headline say stocks are rising. The problem with this approach is that indices movements cloud what may be important shifts in values and prices and when the main news highlights what is happening in the market much of the gains are gone, making it riskier to invest. From the end of August to September 19th in 2014, the all Jamaica index rose by 1 percent while for August it remained flat. The junior market index rose 3 percent towards the end of September, but was flat for August. But something else was happening that bode well for continuation of an upward move of the market, more importantly, upward move for some stock prices. In September up the 19th the all Jamaica index rose on 53 percent of trading days, while for the junior market it was 60 percent and with the month not ended the ratio could improve. In August the ratios are 42 percent and 48 percent respectively. The advance decline ratio tells a far better story than the indices movements. The main market had only 7 days when the advance decline ratio was negative and so far for September, that number is just 4 with 7 trading days to go before the month ends.
Interest Rates| Rising interest rates drive money out of stocks into other investments, the reverse is also true falling rates drive money into stocks to position for better returns in the stock market. Interest rates on government Treasury bills have been declining since May 2014 and flows in the forex market are buoyant with the local dollar remaining stable. Technically, the main market is seeing the short term moving average on the verge of crossing the medium term moving average, a bullish sign. Importantly, many listed companies have posted some attractive results for 2014 that is supportive of an upward push in their stock price. These are positives that will help the market.
Few investors picked up the above signals, it was not until April 2015, when newspaper reports of an investment forum was reported that the wider public became aware of the bull market that had its genesis from 2014 and was up 21 percent to the end of March from the June 2014 low.
The above was posted on September 23, 2014 and is reproduced with slight modifications.

Do you really know your adviser?

Berger Paints is worth more than $20 per share.

The directors of Berger Paints should have their resignation letters ready for signing after in early October, as their continuing service will be in conflict with the recommendation they gave minority shareholders who seem set to rebuff it.
Investors need to be adequately informed as there are wolves out there to help snatch valuables from them. Salada Foods is a very profitable entity after the broker to a takeover offer and audit firm recommended shareholders to sell their shares for an undervalued amount back in the 1980s. According to the auditor, the plant was obsolete and coffee powder was no longer accepted by consumers. The broker suggested that minority shareholders will have to eat their shares for their stupidity in not accepting the offer. Three decades on and the company remains profitable and debt free and those shareholders who held their shares have done extremely well by doing so. I wrote at the time of the offer that it was unfair. I gathered that the chairman Mr. Charles Ransom at the time, on a flight back to Jamaica, dammed John Jackson for killing the offer, when he saw the story that was highly critical of the offer. That was a few days before the vote that rejected the offer.
In 2010 the first Junior Market listing IPO was condemned outright by a featured article in the Friday Business Observer, followed by a series of comments by doomsayers. The arguments against the offer were so uninformed that I wrote an article defending it fully.
One of the critics wrote, “I looked over their prospectus the very day it was released and came to the very same conclusion that this price is pie in the sky!! I have a degree in Finance and I invest in companies on the JSE, including Mayberry and I think this is a sad day in IPO valuation. They had the opportunity to set the standard for the Jr. JSE and they are muggin it up. The conclusion I draw from their pricing is that they take the Jamaican investor for idiots, like so many companies in Jamaica. And they are playing on peoples’ greed. I would love to invest in this company and if it hits the market I will wait for the price to realign to it’s proper valuation before buying.”
And yet another investors comments, “Mr. Jackson everyone has a right to his or her opinion, you Sir should have done your homework. I am not a stock broker, but I was interested in the offer and did my research, after reading the Prospectus I decided not to take up the offer.”
“Look at likely future earnings, the future of Access Financial looks BAD. WHAT IS THEIR BUSINESS??? SUB-PRIME LOANS. In the USA a company such as this would be called a predatory Lender. The business model looked okay 3 to 4 years ago, but now it just looks dismal. Most of the clients the forward looking statement alludes to are people who live paycheck to paycheck. With all the talk of layoffs and cutback in the Jamaican economy, how does the principal of Access expect their business to grow?”
“One point made in the prospectus is that Government does not regulate this particular company, and therefore they can keep their interest rate on their products higher. Look at the percentage of bad loans recorded for 2008, and then compare that to the 9.09% projected non-performing loans in the prospectus. Come now Mr. Jackson, does this sound right to you?”
In response to my article saying the market is huge the reader had this to say,“How is the market huge when this company’s business model caters to small and micro business sector? Take an informal survey on how many micro business have pulled down their shutter since the year started. If I did not have access to information I might have called you for guidance as a stockbroker, what a disappointment that would have been.”
My current response, they made a big mistake in reading the prospectus first, as they would have done far better had they done the right thing. One investors who was advised to buy, did just that and enjoyed wonderful returns.
Earlier this year, a brokerage house was recommending Cargo Handlers as a buy in the $20 range when the PE ratio was in the 50 region. Another last year recommended investors sell Barita Investments, saying the stock was not worth much more than just over $2. Where are these two stocks at presently? One is much lower than the recommendation and one much higher? And for naysayers in Access Financial who cause a number of persons to stay out of Access, they may have learnt from the experience, hopefully as the stock now trades at the equivalent of $460 per share and never fell below the issued price once. In addition investors have reaped a large amount in dividends and the growth goes on. The Berger Paints recommendation to sell is just another of those poor valuations done by persons who don’t really know how to value listed companies. The market will speak in a few weeks on this.

Is trading IPO issues a good idea?

The question of the week comes from one of IC’s readers. “ I’m trying to understand more about investing and would like to know about buying stocks at the IPO price, selling when they go up and then buying when the prices settles lower? Does it make sense to do so?
The answer to the question is yes and no. it can be done but understanding where the stock may top out initially, is going to be the key. You have to determine the price to sell at and then identify when to get back in, as well as where the price may go after reentry. Those targets are not always easy to assess. A good example is Main Event, it went to $5 early after listing and then pulled back a bit and went over $8 and pulled back to $4.85 last Week. Express Catering went over $5 initially and pulled back to $3.80, traded recently at $5.60 and pulling back again. Trading fees can cost up to 5% to get in and out that needs to be factored into the equation of potential trades as well.
Knowing the PE and how the stock compares to others in the market, will help a great deal to determine the likely top for a stock. The use of PE ratio and comparing them with other stocks gives a good indication which stock has a better valuation, but it may not tell when that difference will be eliminated. Currently, just below 20 times current earnings, seems to be a good exit point as the target for IPOs and say 20% or so below could be a good reentry point.
Picking tops and bottoms in markets is not always easy, unless historical records are used in the assessments. This technique is better known as technical analysis where markets or products, in this case stocks, establish set price patterns over time, often trading within what’s called a channel. Channels allow investors to better pick tops and bottoms, while the items is trading within the channel.

Scotia Equity Fund tops at 39%

Scotia Investments Capital growth Fund tops in last 12 months.

Getting the best out of one’s investment requires regular reviews and sometimes changes to what we may consider prime holdings. A look at some of the high flying Jamaica Stock Exchange listings this year, tells the story pretty well.
The prices of many rose to exceedingly high valuations, on the back of strong buying, only to see prices fall back later with selling exceeding buying, as investors who bought low, offloaded their holdings, booking profit in the process.
That many may go on to recover losses incurred as a result of buying close to or near the top. In a number of cases, it may take quite some time to recover fully, while other opportunities to profit may go by. The Jamaica Stock Exchange share traded at $13.50 but now trades at $7 or Cargo Handlers trading at a high of $30, and is now at $16 and could fall some more with the price still seeming to be about 50 percent too high. Getting back to the top for these two will be challenging in the short term.
What then is happening to securities that move in a more mild-mannered than stocks but better than money market instruments? Unit trusts are a pooled investment vehicle that are managed by experienced persons.
Many persons only want to know that their investment grow at a reasonable pace and not so much on the rate of return, that will not be good stewardship of their resources. Investors should review their portfolio at least once per year and make changes where needed.
A close look at the Unit Trust bi weekly report that are published in the Jamaica Observer and Jamaica’s Daily Gleaner is revealing. Not all stocks are alike so it is with the pooled Unit Trust investment funds.
The performance of the Unit Trust funds vary from one to another. The equity based growth funds varied from 39 percent growth in case of Scotia Investments Premium Growth Fund, to a low of 28.47 percent for Sagicor Sigma Equity Fund for the last 12 months to date. Coming second, is Barita Investments Capital Growth with 34.55 percent. For 2017 to June 22, NCB Capital Markets equity fund delivered 29 percent for the last 12 months, but is the leading equity linked Unit Trust funds with gains of 21 percent, Scotia Investments Premium Growth Fund, is just behind, at 20.4 percent, edging out Barita Investments with 19.7 percent. JMMB Fund Managers landed 31 percent for the last 12 months and 18.9 percent since January with their Income and Growth Fund.
Sagicor and VM Unit Trust lag in the equity category, while Barita Investments FX Growth Portfolio fell 10 percent for the last 12 months and 5.7 percent since 2017 and the real estate fund, slipped 3 percent for the last 12 months and 5.7 percent for 2017 to date.
Returns on money market funds have been much more competitive with returns mostly around 5 percent annualized.

The Exuberant 10

The JSE stock traded at an outlandish $13.50 & dropped 47% since.

It is not nice to watch one’s investment lose value while others grow delivering big gains at the same time. Many investors plunge into investments that will result in just that happening, as they err and refuse to let go and reinvest, to recover their loss, from gains elsewhere.
A look back at prices in 2005, reveals shocking results of costly ill-timed investments. In June 2005, investors in a bout of excess exuberance, pushed Mayberry Investments to $8.40 from a listed price of $5.05, weeks after it listed on the Jamaica Stock Exchange, 12 years later it is still to reach back to that level. That is a huge blow to investors who held on to the shares from then.
The sad thing is that many investors who wanted to sell could not, as attempts were made to control the price from a big drop as selling started to overwhelm buying a few days after nearly 40 million shares were traded around the $7-8 level. Mayberry is an outstanding example of investors making huge errors based on inadequate information and paying dearly for it.
But Mayberry’s stock is not the only one that investors underwent a long period of suffering from, they have a number of top notch companies as their friends that that performed poorly until fairly recently. Scotia Group was pushed to $33.50 in March 2005 based on results that were not sustainable as the bank benefited by a poor decision of the Central Bank to push interest rates on CDS paying interest at elevated levels for about two to three years. The banks of course made a killing when rates fell back. Added to that, Scotia effected a stock split that sent the stock flying. Well it was not until late 2016 that the price exceeded the 2005 high. JMMB Group’s shareholders saw the price of the stock peaking at $22 in April 2004 only to see it fall away and not getting back to that level until recently this year. That is not great for a stock that is not a great dividend payer.
Grace Kennedy hit a high of $123 (Now $41 after stock split in 2016), in January 2005, it has taken nearly 12 years to recover the loss and it has still not delivered much more in gains since its full recovery.
Markets tend to repeat past behaviors, over and over but sometimes they take a break from the norm. PE ratios are the end product of investors’ perception of values for stocks. There are other measures but the PE is the most widely used. When PEs are pushed well beyond where the majority of investors thing the value ought to be, they induce added buying or selling. Investors who buy when the market has pushed valuation well above what is considered the norm, usually pay a steep price for so doing. The 2005 examples are cases in point. An accepted concept is that the PE ratio should be line with profit growth. One year’s growth cannot be used by itself but investors have to try and determine that themselves.
Most of the stocks in the IC Insider’s Exuberant 10, were pushed in 2017 by excessive enthusiasm and in some cases wrong information. Stock splits helped to fuel some of the excess as well. The attached table shows the stocks that were pushed well above their appropriate values and the levels of correction since. Some may fall even more than their latest price as they can be considered overvalued based on known earnings for the current period. A few that are not on the list could see a decent fall as well, included in this latter list are Knutsford Express and Kingston Properties.

NCB & Berger could break out soon

NCB Financial Group’s shares looks like they could break into the $70 range soon.

In a shortened trading week on the Jamaica Stock Exchange, only one of the TOP 10 listings dropped out with Lasco Financial rising in price and gave way to just inch in Caribbean Flavours at 10th spot. For the coming week, NCB Financial Group is worth watching, with supply and demand at the close of the past week suggesting that the price could break into the $70 range before long.
is another stock worth watching with IC upgrading earnings for the 2018 fiscal year starting April, to $1.90 from $1.60 previously used and 2017 earnings to $1.30 from $1.10. Berger ended the previous week with a last sale price of $12.20 but moved up by the end of the week to $14, closing with an offer of 1,453 units at $15 while 22,600 units are on the bid at $13.55.
The average PE ratio of both markets are currently at an average of 12, based on this year’s estimated. At the close of the markets on Thursday, IC’s TOP 10 Junior Market stocks continue to trade at an average discount of just under 40 percent to the Junior Market average, those in the main market are trading just below 50 percent discount, leaving several stocks with good room for growth for the rest of the year.
Release of 2017 first quarter results will be important in determining if the steep price discount will continue for much longer, or whether the historical May syndrome of reduced market interest came early this year and last until summer or after, similar to 2016.
Overall bid volumes for junior market stocks remained low at the close of the past week continuing the low levels at the close of the week before.
Caribbean Cement continues to trade with a heavy downside bias notwithstanding the rise in price for the week to $32, with last year’s first quarter results dated April 20, this year’s results could be out in the coming week and provide direction for the stock. JMMB Group’s buying interest is at $18.10 for 2,073 units on the bid and 409,862 units offered at $18.40, NCB Financial Group traded on Thursday at a new record high of $66.90 before pulling back to $65 at the close, supply seems low and could help the price move up ahead of second quarter results, that should be out before month end. The stock also traded at a new high in Trinidad this past week. Pulse Investments has offers to sell 245,639 units at $8 with buying at $7 for 1,000 shares, the same as for the prior week. Radio Jamaica bid is at $1.60 to buy 279,561 units with 100,940 units on offer at $1.75 and Scotia Investments closed the week with only 550 units on the bid to buy at $37 and 4,180 units offered at $39.40.

Non-dividend stocks as investments?

The payment of dividends is only one element to consider in investing in stocks. Investing companies that do not pay dividends should not matter seriously, in the short.
This is true if companies are using the profits to grow the business.
Capital gain is the most important return investors look for in buying stocks. In the long run stocks that don’t pay dividends tend to grow faster than most, but ultimately they will make dividend payments to their shareholders, thus increasing the return on investment.
The most important factor in buying stocks is whether their values are relatively low enough to make for a profitable investment down the road. At the same time, investors should not only look at a company by itself and compare the likely growth with other stocks, with the ones showing the greatest potential being invested in.
If income is the main objective, then investors would need to look to those stocks paying the h level of dividends relative to the stock price.