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.
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%.
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”