Could these listed companies be classified as foundational stocks?

If you have keenly been following the series on ‘get to know your mutual funds’, you would realise that in each post, the top 5 equity holdings of the fund’s portfolio are highlighted. Interestingly, of the few mutual funds covered so far, there appears to be much similarity in their various top 5 equity holdings. In other words, most of the mutual funds list similar companies as their top 5 equities. Out of curiosity, other mutual funds were also looked into to find out if the similarity trend would remain unchanged. To achieve this, some of the most recent annual reports (where available) of major mutual funds were examined. In all, 19 annual reports were studied, which covered 7 different mutual funds (both equity and balanced funds). The main purpose was to figure out if the topmost equities repeating more frequently in the various mutual funds could be considered as foundational stocks. In doing so, these stocks could become a sort of principal, key or foremost stock picks for investment portfolios. Many would agree, to some extent, that mutual funds are managed professionally by fund managers. Hence, following in the footsteps of these fund managers by replicating some of their top stock picks can be useful.

Why foundational stocks?

Investing in stocks is one of the most proven means to build wealth. However, picking the right stocks from the market can be challenging, especially for the novice investor. One requires a good portfolio mix comprising the right stocks in order to be successful. Just like building a house requires strong foundation to ensure its robustness, building wealth with stocks may equally require careful selection of stocks, in particular, starting with good foundational stocks. A poor foundation can cause your building to tremble or worse, topple down, so do poor foundational stocks can cause to your investment portfolio. Arguably, maintaining strong foundational stocks in your investment portfolio comes with some benefits such as good investment returns. Moreover, strong foundational stocks can somehow protect an investor from the impacts of market falls.

Summary procedure for selecting foundational stocks

As stated earlier, the top 5 equity holdings of seven (7) different mutual funds were compared. The mutual funds were Databank Epack, Databank Bfund, SAS Fortune Fund, HFC Equity trust, HFC Future Plan, CDH Balanced Fund and FirstBanc Heritage Fund. To ensure the use of up-to-date data for decision making, data covering the latest three years (2016, 2015 and 2014) were utilised. The topmost equities frequently appearing in the various mutual funds were preliminary grouped, followed by brief background study of their performances. The table below provides comparison between the top 5 equity holdings of the seven different mutual funds. For detailed (raw) data of the top equity holdings compilation, click on this link: Top five equity holdings of selected mutual funds.

 

Table 1: Comparison of top 5 equity holdings of selected mutual funds

 

Mutual fund

Top 5 Ghanaian equity holdings

2016

2015

2014

1 Databank Epack EGL, FML, GCB, SCB, MAC EGL, FML, GCB, SCB, TOTAL EGL, FML, GCB, SCB, SOGEGH
2 Databank Bfund EGL, FML, GCB, SCB, GOIL EGL, FML, GCB, SCB, GOIL EGL, EGH, GCB, SCB, TOTAL
3 SAS Fortune Fund EGL, FML, GCB, SCB, GOIL EGH, FML, GCB, SCB, GOIL EGH, FML, GCB, SCB, GOIL
4 HFC Equity Trust EGH, FML, GCB, TOTAL, GOIL EGH, ETI, GCB, TOTAL, GOIL EGH, HFC, GCB, EGL, TOTAL
5 HFC Future Plan EGL, FML, GCB, SCB, GOIL EGL, ETI, TOTAL, SCB, GOIL EGH, HFC, GCB, SCB, CAL
6 *CDH Balanced Fund CAL, FML, GCB CAL, FML, GCB Fund was not yet established
7 FirstBanC Heritage Fund Annual report not available EGL, EGH, GCB, SCB, SOGEGH EGL, SOGEGH, GCB, TOTAL, GOIL

*CDH invested in only three (3) stocks.

Observations and analysis

From the table above, GCB bank Ltd. (GCB) occurs 18 times out of the 19 studied annual reports. This is followed by Standard Chartered Bank (GH) Ltd. (SCB) which can be counted 13 times out of the 19 annual reports. The rest, in descending order, are Fan Milk Limited (FML), 12 times; Enterprise Group Limited (EGL), 12 times; Ghana Oil Company Limited (GOIL), 10 times; Ecobank Ghana Limited (EGH), 8 times; Total Petroleum Ghana Limited (TOTAL), 7 times; Societe Generale Ghana Limited (SOGEGH), 3 times. CAL Bank Limited (CAL), 3 times; Ecobank Transnational Incorporated (ETI), 2 times; HFC Bank (Ghana) Limited (HFC), 2 times; Mega African Capital Limited (MAC), once.

In total, 12 different stocks could be found in the top five equity holdings of the mutual funds. However, considering the comparatively low occurrences of SOGEGH, CAL, ETI, HFC and MAC, they were delisted, leaving the rest of the seven stocks as the preliminary group for further studies.

 

Table 2: Preliminary group of foundational stocks

Stock Number of occurrences in top 5 holdings
SCB 13
FML 12
EGL 12
GOIL 10
EGH 8
TOTAL 7

To study further on the above stocks, their historical performance trends were looked into. Simply, two main performance indices were examined- annual returns and dividend yields. It must be noted that stocks with fairly good returns can be indication of investors’ confidence in the companies. Furthermore, while dividend pay-outs provide regular income source, they also signal financial stability of companies. The latest 5-year annual returns and dividend yields of the stocks can be seen in the tables below.

 

Table 3: Latest 5-year performance results

Company Trading symbol Return, %
2012 2013 2014 2015 2016  Average
1 Enterprise Group Limited EGL 26.3 291.7 -6.9 37.1 0 69.6
2 Fan Milk Limited FML 50.4 86.5 -20.7 40 51.7 41.6
3 Ghana Oil Company Limited GOIL 93.8 43.5 19.1 33.3 -21.4 33.7
4 GCB Bank Limited GCB 13.5 131 13.4 -34.9 -6.1 23.4
5 Ecobank Ghana Limited EGH -6.3 87 35.5 7.6 -8.6 20
6 Standard Chartered Bank (GH) Ltd. SCB -74.7 29.9 36.2 -19.9 -25.2 -10.7
7 Total Petroleum Ghana Limited TOTAL 18.5 N/A 20.6 -16.4 -61.2 -9.6
GSE all-share-index 23.81 78.81 5.4 -11.77 -15.33 16.18

 

Table 4: Latest 5-year dividend yield

Company Trading symbol Dividend yield, %
2012 2013 2014 2015 2016 Average
1 Enterprise Group Limited EGL 3.33 0.00 1.43 1.04 2.1 1.58
2 Fan Milk Limited FML 1.13 0.00 1.71 0.00 1.4 0.85
3 Ghana Oil Company Limited GOIL 2.26 1.61 1.52 0.00 1.8 1.44
4 GCB Bank Limited GCB 3.33 2.94 3.96 8.44 8.7 5.47
5 Ecobank Ghana Limited EGH 8 5.18 5.66 11.27 12 8.42
6 Standard Chartered Bank (GH) Ltd. SCB 26.52 3.14 5.65 0.00 2.3 7.52
7 Total Petroleum Ghana Limited TOTAL 2.81 13.72 1.61 2.25 2.3 4.54

In terms of annual performance, with the exception of Standard Chartered Bank (SCB) and Total Petroleum Ghana Ltd. (TOTAL), the rest of the stocks show impressive positive results. Moreover, their average returns exceed that of the GSE (all-share index) in the same period. Enterprise group limited (EGL) beats the GSE index in 4 out of 5 years. Fan Milk and GCB similarly perform better than the market index in 4 out of 5 years while Ecobank and GOIL both exceed the index in 3 out of 5 years.

For dividend yields, Ecobank Ghana and Standard Chartered Bank lead with impressive average yields of 8.42% and 7.52% respectively.

It may also interest you that five of these stocks had even been commended in an earlier article recently. In the article by Kofi Busia Kyei (a financial analyst), EGL, EGH, FML, GOIL, and GCB were highlighted together with UNIL and BOPP as the few listed stocks that had offered great returns to investors in the past 10 years (Refer to the chart below).

foundational stocks _performance
Figure 1: 10-year return of selected stocks on the GSE Credit: Kofi Busia Kyei (a financial analyst)

Even though the performance trend of SCB doesn’t look so good, the high extent of its occurrence in the top five holdings of the various mutual funds may be due to positive future projections. The fund managers may have realised from their analysis, good earning or growth expectations of SCB, thus chasing its shares. Don’t forget that SCB is one of the few stocks that have recorded impressive returns in the current year so far. In fact, since the beginning of the year, its share price has appreciated by 115.52% as of 8th August 2017. Hence, considering it in our foundational stocks can be worth it. Unfortunately, because of the comparative low performance of TOTAL, in addition to its least number of occurrences in the top five holdings of the funds, delisting it from the group may be helpful for now. As a result, GCB, SCB, FML, EGL, GOIL and EGH can be finally listed as our proposed foundational stocks- six foundational stocks made up of three banking stocks, one insurance stock, one manufacturing stock and one petroleum stock (see Figure 2 below).

Foundational stocks
Figure 2: Proposed foundational stocks comprising six listed companies

Conclusion

The similarities between top 5 equity holdings of various mutual funds gave rise to this write-up. Through comparison and further background studies, six listed companies have been proposed as foundational stocks. These can be useful to investors in building their stock portfolios.

If you’re a new investor deciding on buying stocks from the exchange, you can think of starting with at least, one of these companies. Furthermore, investors who are already trading in stocks may also consider rebalancing their existing portfolio and perhaps buy more of these particular stocks.

Finally, if you’re yet to own shares of these stocks, my personal advice is to begin moderately with the ones that have already attained high appreciation in their share prices. For instance, the year-to-date returns of GOIL and SCB are currently 108.18% and 115.52% respectively, as of 8th August 2017. Even though they still have the potential to continue with their gains, the potential to fall is also inevitable due to the high prices already achieved.

 

4 financial stocks you may consider buying

4 financial stocks

Financial stocks generally perform well on the Ghana Stock Exchange in comparison to stocks of other sectors. Although I invest most of my stock portfolio in equity funds managed exclusively by professionals, I also enjoy picking some stocks on my own. Yeah, sometimes it’s fun to do some things on our own even though we may not be that ‘professional’. However, since stocks require some needful attention, I prefer to select very few ones which I can keep track. When it comes to stocks trading, a lot of measures need to be considered. For simplicity, I mostly look at three basic factors:

1. The price & worth of the stock.

2. How active the stock trades on the market.

3. How consistently dividends are paid by the listed company.

See also: A simple stock trading strategy for the risk-averse investor

Price & worth of stock

A huge portion of returns accrued from stocks come from capital gains. That is, the profit made by selling stocks at prices higher than what they were bought for. In other words, in an ideal condition, stocks should be sold at prices higher than what they were bought for in order to make some gains. The performance of the Ghana Stock Exchange (GSE) has been on a downward trend this year, with a year-to-date composite index of -12.11% as of 10th June, 2016. This compounds the stock market’s loss of -11.77% for the year 2015. In effect, prices of many listed stocks have drastically dropped from their previously high prices. While it may be logical to buy stocks during this period, it is also cautious to look beyond their low prices alone. Importantly, It is vital to also consider how valuable the stock is, even though the price may be low. A simple metric used to determine the value of a company’s stock is the ‘price per earning’ (P/E) ratio. P/E ratio measures a company’s current stock price relative to the company’s earnings. In essence, it can be used to decide whether the stock of a company is worth buying or not. A low P/E ratio may indicate that the company is undervalued or doing quite well relative to historical trends. In contrast, high P/E ratios normally imply overpriced stocks. It is always advisable to only compare P/E ratios of companies in the same industrial sector. This is because different ways are employed by different sector organisations to earn their money.

Stock activeness on the market

There are a few stocks on the Ghana Stock Exchange that hardly exchange hands. Most of such stocks are held for long term by institutional investors such as the Social Security and National Insurance Trust (SSNIT). Consequently, it becomes difficult to buy or sell them on the bourse. There has been an occasion when my money was locked up by a stock broker for much longer than expected due to the lack of trading activity for the stock I opted to buy. As a result, the money lost value pending the long wait for the stock purchase. I guess you already know the behaviour of our Ghanaian currency, right? It is for this reason why I now pay attention to stocks that actively trade on the market.

Consistency in dividend pay-outs

Many of us are aware that stocks are long-term investment products. But, how patiently can we wait to reap the final long-waited returns? I agree that companies must reinvest their profits in order to grow and make more returns. However, I also believe that as investors or shareholders, there should be some form of regular motivation to keep us investing in the companies. Of course, we need to stay ‘alive’ while we keep waiting for that faraway future growth. Unfortunately, not all listed companies consistently pay dividends to their shareholders. Thus, paying attention to historical trends of dividend pay-outs would be worth it when deciding on stocks to buy.

 

The 4 selected stocks

Now, imagine buying a product which sells at 30% less than its original price a few months ago. If this product is still of good quality, won’t it be worth buying more and selling them later when the price restores to the original high price or even higher? This is the primary motive behind the four picked financial stocks.

1. UT Bank Ltd. (UTB)

The current price of UTB stock is GHS 0.07 as of 10th June, 2016. About a year ago (12th June, 2015), the same stock sold for GHS 0.19, reflecting a huge loss of 61% within the same period. The current P/E ratio of UTB is 3.5 which appears to be relatively low. As an additional background, the initial public offer (IPO) of UTB was sold in 2009 at GHS 0.3/share. The stock struggled for a while but managed to reach as high as GHS 0.52 on 10th June, 2013. Concerning its activeness on the bourse, UTB is one of a few stocks that regularly trade in high volumes. The bank has however been facing some challenges in the past years making it difficult to pay dividends to its shareholders. The last time dividend was paid was 2012, with a dividend yield of 5.26%.

 

UT bank performance chart- financial stocks
One-year performance chart of UT Bank

 

2. Ghana Commercial Bank Ltd. (GCB)

The current price of GCB stock is GHS 3.04 as of 10th June, 2016. The same stock sold for GHS 4.9 a year ago (10th June, 2015), reflecting a loss of 38% within that period. Continue reading “4 financial stocks you may consider buying”