Research tools for Kenyan Investors

                         By 

                                    Rakeli Gichuki and Wambui Mukundi

In previous articles on this subject matter, we demystified the myth that gambling and trading in the stock market is the same thing. While not refuting the role of chance in both, we alluded to the fact research and information is a key differentiating factor. Further, we touched on the kind of relevant information required by prospective traders. We examined external and internal factors affecting the price of securities. This piece is an extrapolation of the previous articles and answers the question “where do I find the relevant information needed in contemplation of a trade?’’. It looks at the reliability of relevant information as against various existing sources of information.

The rules on a good source of information are the same regardless of the reason for which the information be sought. A good source of Information is one that is in line with the principles of Authority, Accuracy, Currency, Objectivity and Presentation. These principles work the same whether the sources are physical or online. This discussion looks at the reliability of research tools available for stock traders market based on the above named principles.

Ideally, when a company goes public it opens all its doors to members of the public to gain ‘reasonable’ access to its information. Most companies have online presence where various company documents are posted for the benefit of shareholders and prospective investors. On the flip-side currency and relevance of the information is often questionable.

It is also dreary to expect that a trader will visit all listed companies either physically or online to access the information. A preferable source is therefore one that can consolidate the data from all listed companies and present it wholesome to save a trader the trouble of accessing it in piecemeal.

There are various avenues where individuals can access information on listed companies. This information may range from statistical analysis of the performance of companies and general news relating to a certain industry or company. Below is an analysis of various sources of information

     Newspaper sources:

          

Business Daily

+Business Daily Africa is a print and online newspaper that features news about the east African market and commentaries. Companies usually publish their earnings in this newspaper. 

The online site also provides commentaries on industries and market events that could affect the stock market. It also has the Nairobi stock exchange live market ticker that gives up to date information on stock prices

         Kenya Business Review

+Kenyan Business Review is a website that provides a myriad of business information for investors and people evaluating their investment options. The information provided not specific to listed companies. It is also not in-depth and might not be provide sufficient information to seasoned investors. It is not the best available option for investors.

Investor websites

Rich.co.ke  vs. My stocks portal

+myStocks portal and Rich are the two main independent online sources of information relating to the stock market in Kenya. Both sites are authorized data vendors by the Nairobi Securities Exchange and therefore score highly on authority.

Below is an analysis of the reliability of the data on the sites.

Rich.co.ke	My stocks  portal
No subscription fee	Some information such as the performance charts and market news is available free of charge. However detailed analysis of historical performance of listed companies, is accessed at a Subscription fee of Ksh. 1000 per month
Provides real time information and figures required for fundamental analysis that are up to date	While the price last quoted share price are as real as reflected on the NSE website, some of the figures required for fundamental analysis provided in this websites are out-dated. For instance recent financial reports at best only go as far as the year 2012
Provides information on financial results among other as downloadable from the NSE website	Some of the important values are missing in the financials tab such as income statement and cash flow statement are not populated
Provides a chart depicting historical prices that is less user friendly	Provides a user and well presented  friendly list historical prices of stocks
Provides history of market capitalization figure of listed companies dating back to five months	Market capitalization figure is provided on month frequency and  the site does not provide historical figures on the same
Data presentation is done in a rather random manner that may be frustrating to a first time user finding	Presentation of data is very friendly manner for ease access  even if the site is packed with
Commentary on performance of listed company is not detailed and no diversity of business analysts. Commentary is also lacking in as far as availing current news on different industries	Provides a detailed commentary on performance of listed companies and different industries; this is very useful as written by renowned business analysts.

Nairobi Securities Exchange and Capital Markets Authority

The Nairobi Securities Exchange (NSE) is a company licensed by the Capital Markets Authority (CMA) to facilitate the trading of financial products through the provision of a trading platform for listed securities. 

The Capital Markets Authority is an independent public agency established by an Act of Parliament, Cap 485 A under the Ministry of Finance. The CMA is a regulating body charged with the prime responsibility of supervising, licensing and monitoring the activities of market intermediaries, including the stock exchange and the central depository and settlement system and all the other persons licensed under the Capital Markets Act. It plays a critical role in the economy by facilitating mobilization and allocation of capital resources to finance long-term productive investments.

The NSE and the CMA, both provide vital information in discharge of their mandate as required by their respective establishing Statutes. While the NSE  will publish data such as the and live share prices throughout the day, daily and historical  market statistics; CMA will provide data on corporate governance, Legal and  Policy Issues relating to listed companies. Needless to say, the websites are definitely authorities in this field. However, these sites do not go into detail to give the specific performance of a particular company. They provide snapshot and detailed reports of the general performance and matters of law relating to the stock market in Kenya.

In conclusion, it is important to note all the above sources provide general information about stock options and are not responsible for any losses due to reliance on the information given. Different sites are strong in some aspects and others not. It is therefore advisable that investors and prospective traders use the available sources as complementary sources of information to maximize the quality the information.

When thinking about stock options, what do you consider?- Part 2

By 

         Rakeli Gichuki and Wambui Mukundi 

Market analysis is an acquired taste. It is usually not a love at first sight kind of affair for those of us who are not in this kind of field. The study of markets demands a lot of respect and commitment if one is able to understand it and actually make financial gains from the practice. It is part hard science and part art and the information/tips outlined in this article are nowhere near exhaustive.

Earnings Release

In an ideal world, company earnings should affect the stock price in a manner that is more or less predictable. However, the stock market is most of the time not ideal and the cardinal rule is not to react to pieces of information in isolation. Ideally, when company’s earnings releases are impressive, the stock price is supposed to go up after a certain period of time. This is because the forces of supply and demand apply as they would in a perfect commodity market economy, which is, when the demand is greater than supply the prices increase and the supply is greater than demand, prices usually tend to fall.

Therefore, when the company earnings are impressive, then the demand may become greater than supply thus leading to a spiking of the stock price. This kind of analysis is purely focused on effect of investor sentiments on the stock price. It is important to note that, the stock price is not a reflection on the company’s value. The company’s value is calculated by multiplying the stock price by the number of outstanding shares, and there are instances when companies with a higher stock price have a low value.

Therefore, even though a company has impressive earnings release, what determines the ultimate stock price of the company is the investors’ sentiment through the forces of demand and supply.

Mergers and Acquisitions (M&A)

When a company is acquired by another company, the stock price of the acquiring company goes down due to the premium costs of the acquisition while the target company’s stock will rise. All these price movements happen in the short term. In the long run however, an acquisition is a lucrative venture for the acquiring company.

There are situations in which a private company acquires a listed company. This is called a reverse acquisition or merger, according to the particular circumstances. The main aim of a reversed acquisition (or merger) is for the private company to become a public listed company without going through the long process of listing and the risk of dilution of share value.  A good example in Kenya was in 2012 when +I&M Bank Ltd was able to become a listed company through a merger with City Trust. In this kind of agreement, I&M provided its own stock as consideration for the City Trust shares. In other words, I&M acquired majority shareholding in City Trust by trading its own shares. What happened next was that I&M became a listed company, before the completion of the merger, City Trust share price spiked temporarily.

We cannot exhaustively outline all the scenarios related to the effect of share price after mergers and acquisition of course for the obvious reasons that they vary according the particular case in question. However, it is important for the investors to be alert as to the reasons behind the M&A in order to make a smart investment decision.

Dividends

When looking at dividends, it is important to evaluate dividend as a percentage of share price, by dividing the dividends per share with the price per share, in order to follow an option with a stronger dividend yield. This is because a focus on the dividend amount that is being paid out by a particular company maybe misleading. For instance, company O may be offering a dividend of 15 shillings per share with the stock trading at 300 shillings. Company F on the other hand is offering 5 shillings per share with its stock trading at 50 shillings. Company dividend yield is 5% while Company F is 10% meaning a smart investor will go with the latter as it has a higher yield.

Further, companies that pay out dividends are more stable than companies that do not.

Layoffs

Different companies have different reasons for lying off its employees. Some Layoffs are usually as a result acquiring of a new technology, that declares some employees redundant, or cost cutting measures, part of a company restructuring or even after a job evaluation exercise. Ideally, layoffs are good for a listed company as it reduces salary expenses and this should help increase the earnings. Sometimes layoffs are interpreted, as a sign that the company is not doing well and therefore may lead to a decline in the stock prize especially short-term However, the reason behind the layoff or at least the public’s interpretation of the same is what determines its effect on the stock price. It is therefore important to check the politics surrounding layoffs before purchasing the stock in the company. Some lay off also come with massive lawsuits from aggrieved ex-employees and sometimes class action suits, which known to drain resources of companies. In Kenya, +Kenya Airways laid off many of its workers as part of its strategic plan. During this period, there was a drop in their share price then later regained its position. While we are not saying that, our research revealed a direct correlation to the layoff it may have had some play.

New products

Purchase, sale or call back of a product of a listed company has an effect on the share price of the said product. Purchase of new product may mean a decline of the share price especially if the product consumes a large amount of the company’s resources. However, for the long term the product could be advantageous for the operations of the company. The effect of such information on the share price will depend on how that affects the immediate and future earning of the company as well as the public’s interpretation of the information. Just recently, +Safaricom announced its planned acquisition of some assets from Essar Telecommunications Limited. Its directors expected the multi-billion shillings deal to have effect on its share price. This information was disclosed at the beginning of March this year when the share price was 11.65 shillings. Thereafter the share price gradually rose to 12.35 shillings in mid March. The rise continued with slight declines now and then to close at 13.0 shillings as at 19th May 2014. While Safaricom has made many announcements in between that analysed period, it is our opinion that the information had a play in the increase in the share price.

Company scandals

Scandals involving listed companies depict the securities markets in a bad light. Corruption and such other activities contrary the principles of corporate governance diminish investor confidence in the securities markets generally and in the company involved in the suspect act. In Kenya such scandals were witnessed in 2006 with the allegations of Insider trading against David Kibaru the then CEO of  +Uchumi Supermarkets. The same was also was observed  Later in the fraud and tax evasion allegations against CMC Holdings  later the suspension of several of its directors. While the companies may later recover from the scandal as the case was with Uchumi, it takes a while for before the members of the public can gain confidence to invest in the involved companies.

Conclusion

If you think by now you completely understand the stock market, you have probably not been paying attention :)

When thinking about stock options, what do you consider? - Part One

By
       Wambui Mukundi and Rakeli Gichuki

The reasons for the rise and fall of share value of listed companies are complex. Stock prices are affected by a myriad of direct and indirect reasons depending on the industry and company in question.  Whereas these factors cannot be traced in the financial statements, there effect is always reflected in the books. Companies in contemplation of these factors often conduct a PESTEL analysis to determine how such factors can be mitigated or used in their favour. Individuals intending to invest in the stock markets should also conduct the necessary research on external events affecting or likely to affect particular industry or listed company. Some of the identified external factors include:

National, Regional and International Events

Political events such local and regional wars cause political instability and hinder investor confidence in the stock market thus affecting the performance of specific stocks. For instance, listed companies within the tourism industry suffer loss of revenue due to low sales during an era of political instability. A study conducted to show market performance during the general period indicated that performance of the markets is strongly linked to political events and regime prevailing. The study showed a steady decline of the market performance from 1997 to 2002 during the last five years of the KANU Regime. The market thereafter improved steadily after the transition to the coalition government in 2003. During the 2007, Post election violence there was a considerable decrease in the market performance. The Reuter’s consumer and retail news also reported that TPS Serena had to deal with a slump in Kenya’s tourism market in the first half of 2013 in anticipation of election violence following the events that transpired in 2007.

Sentiments

Investors rely not only on expert opinion but also on how the public reacts to certain information relating to a listed company. This hype maybe about the release of a new product into the market or a merger amongst others reasons. It does not necessarily have to be based on truth but investors are known to nonetheless base their investment decision on the same. A classic Kenyan case would be the Initial Public Offering of the +Safaricom shares. Members of the public heavily relied on the hype to purchase their shares with the company. The shares significantly oversubscribed and demystified the myth that only the wealthy can invest in the stock market. Whether the public was right in purchasing these stocks only the future can tell and I am particularly optimistic. Sometimes the masses are right and the stock is worth the hype however for obvious reasons this is not always the right way to go about investing. Besides, a lot of hype has been created around pyramid schemes that have eventually collapsed.

Development

Developments surrounding certain Industries also have effect on the price of certain securities. Such developments may be social, legal or economic. For instance listed companies embracing technology and moving along with the digital migration are likely to attract more investors as opposed counterparts who do not. +Safaricom also takes lead on this. This is because it shows that the company is striving for efficiency, which results to increased profits.

Inflation

Other external influences include Inflation rates. Investors opt to go for government bonds to take advantage of the high interests as well as ensure protection of their investments. Foreign currency rates also affect the stock market especially foreign companies listed in Kenya and the reverse.

Conclusion

It is the duty of an investor to conduct relevant research with external factors in mind before leaving it to chance. A good method of doing this would be to conduct PESTEL analysis of their preferred stock to determine the factors not foreseeable by merely reading the financial reports of the company. While the above factors may affect the price of a security, it should however be noted that not all developments surrounding a particular industry or company is reflected on the price of the particular security. The effect of both external and internal factors on the price is dependent on how shareholders and potential investors react to the information of the presence of such factors. Some investors react immediately, others observe in order to note the difference in the value of security in question. Others access the information after the effect.   

--------------------------------------------------------------------

References

Agela Kithinji& Wilson Ngugi . Stock Market performance before and after general elections-Acase study of the Nairobi Stock Exchange. Retrieved from http://www.aibuma.org/archive/proceedings/downloads/Angela%20Kithinji,%20Kenya.pdf