Why is this the perfect time to identify great stocks?

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Why is this the perfect time to identify great stocks?

July 1, 2012/ Proshare Analyst

There is no gainsaying that the Nigerian economy is facing some really tough times.

The Naira has been falling, the economic growth is faltering due to the heightened state of insecurity , government deficits are bulging up as it increased by 2.97% of the GDP in the new budget plan and inflation continues to remain high after the partial removal of subsidy on Premium Motor Spirit ; amongst other indices.

All these factors have severely affected the growth and profitability of Nigerian corporates; who appear to have their fundamentals on a positive track. Invariably, the gloom pervading the economy and social structures has put a dent in the confidence of retail investors in Nigerian equities – not with the crowding-out impact of government treasury bills on the corporate bonds market, attractiveness of equities and the policy regime current employed by the CBN.

The data below puts the realities in context:

Despite all these depressing factors however, we strongly insist that there couldn't be a better time to go scouting for fundamentally strong stocks.

Surprised? Let us share with you some of the reasons why we think so.

Most companies tend to do well when the times are good. At such times, it becomes difficult to figure if the success is attributable to the strength of the management, or to sheer luck and positive market forces. Legendary investor Warren Buffett has very aptly said, "It's only when the tide goes out that you learn who's been swimming naked." In other words, it is only when the business cycle turns adverse that the true competence of a company's management can be known.

During the heydays preceding the financial crisis of 2008, several companies chalked out massive expansion plans fuelled by huge debt. Some made big ticket acquisitions while others ventured into unknown territories. Now when the business environment has turned sour, the consequences of these past extravagances have backfired. Many are witnessing a drying order pipeline while their cost structures have inflated owing to the burden of excessive debt. It has now become clear which companies loaded up their balance sheets with excessive risks.

On the other hand, companies that had been wise with their capital, maintained their focus on their core competencies and avoided the lure of excesses have managed to endure the crisis with relatively lesser pain. These are also the companies that have been the best wealth creators for shareholders.

A closer look and analysis of 2008 against 2011 Audited Results of Quoted Companies listed on the Nigerian bourse revealed that 43 quoted firms records positive figures with companies like BAGCO, FLOURMILL and ENAMELWA leading the positive groups while 61 firms records negative figures with THOMASWY, CHAMS and PREMPAINTS taking the lead.

Though DANGCEM which was listed in October 2010 seems to record a better positive performance figure than other quoted firms in that category but it can’t be benchmarked with others as it has not been listed on the bourse as at 2008.

However, the position of 85 quoted firms could not be ascertained as some audited results are not available for analysis. 2008 Audited results for 39 firms is not available for analysis while 59 quoted companies are yet to present their 2011 Audited results to the market.

The Consumer Goods sector seems to be performing better off as it has ten (10) companies with positive outlook while financial services has nine (9). Sectors like Conglomerates and Natural Resources record negative performances as no company records positive position.

This simple analysis simply implies that companies with positive figures are doing better now compared to their position in 2008 and otherwise for quoted firms with negative figures.

Download the Data HERE

It is clear that adverse economic conditions tend to separate the wheat from the chaff. This is indeed the right time for retail investors to roll up their sleeves and stock up the wheat while it's available at a good price.

For More Information contact: analyst@proshareng.com

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