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
GCB 18
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.

 

Performance of stocks on the Ghana Stock Exchange

performance of stocks

Investing in stocks is proven to be one of the most lucrative means of building wealth. Stocks may be either listed or unlisted. Unlisted stocks (also known as over-the-counter stocks) are stocks that are not traded on a stock exchange but directly between two parties in a non-standardised form. Listed stocks, on the other hand, are stocks traded on a regulated market or exchange such as the Ghana Stock Exchange. There are currently about 40 listed stocks on the Ghana Stock Exchange. These are made up of various industrial sectors such as banking, insurance, manufacturing, mining, and petroleum. Usually, the performance of stocks on the Ghana Stock Exchange is captured by the ‘GSE all-share index’. The GSE all-share index, which can further be represented in a percentage format  (GSE return), reflects the overall performance of all listed stocks on the exchange. Refer to this link for all historical GSE returns (from inception to date).

Besides the GSE all-share index, the performance of stocks can also be measured for each individual stock. The most common means of doing this is by computing the return on the stock based on its share price appreciation (or depreciation) over a period. For instance, if a stock starts trading at the beginning of the year at GH¢2 and closes at the end of the same year at GH¢3, the said stock would be making an annual return of 50%. That is [(3-2)/2] ×100.

In the table below, you will find the historical returns of the various stocks listed on the Ghana Stock Exchange. These figures, covering the past six years, are calculated based on their opening and closing prices for each of the years under study. The average returns for the latest five-year period (2012-2016) are also computed.

See also: Performance comparison of mutual funds in Ghana

Performance of stocks: Historical returns of stocks listed on GSE
COMPANY TRADING SYMBOL RETURN, %
2011 2012 2013 2014 2015 2016 Latest 5-year average
1 AngloGold Ashanti Depository shares AADS -16.7 4 0 1.9 -1.9 0 0.8
2 Access Bank Ghana ACCESS N/A N/A N/A N/A N/A N/A N/A
3 African Champion Industries Limited ACI 0 -12.5 -14.3 -66.7 0 -50 -28.7
4 Agricultural Development Bank ADB N/A N/A N/A N/A N/A N/A N/A
5 AngloGold Ashanti Limited AGA 0 8.8 0 0 0 0 1.76
6 Aluworks Limited ALW 8.3 -61.5 0 -60 600 0 95.7
7 Ayrton Drugs Manufacturing Co. Ltd. AYRTN 6.3 5.9 0 5.9 0 -25 -2.6
8 Benso Oil Palm Plantation Limited BOPP 46.7 27.3 129.3 27.7 -38.8 -17.1 25.7
9 CAL Bank Limited CAL -9.4 35.7 162.2 4.1 2 -25.7 34.9
10 Clydestone (Ghana) Limited CLYD -42.9 0 0 -25 0 0 -5
11 Camelot Ghana Limited CMLT -25 16.7 14.3 -25 0 0 1.2
12 Cocoa Processing Company Limited CPC 0 0 0 0 0 0 0
13 Ecobank Ghana Limited EGH (Formally EBG) 6.3 -6.3 87 35.5 -7.6 -8.6 20
14 Enterprise Group Limited EGL -24 26.3 291.7 -6.9 37.1 0 69.6
15 Ecobank Transnational Incorporated ETI -21.4 20 58.3 47.4 -3.6 -63 11.8
16 Fan Milk Limited FML -3.3 50.4 86.5 -20.7 40 51.7 41.6
17 GCB Bank Limited GCB -31.5 13.5 131 13.4 -34.9 -6.1 23.4
18 Guinness Ghana Breweries Limited GGBL -1.9 71.2 136.6 -48.4 -37.8 -18.1 20.7
19 NewGold Issuer Limited GLD N/A N/A -18.8 37 8.9 -0.5 N/A
20 Ghana Oil Company Limited GOIL 10.3 93.8 43.5 19.1 33.3 -21.4 33.7
21 Golden Star Resources Limited GSR -47.1 0 0 -14.9 -15 -2 -6.4
22 Golden Web Limited GWEB -20 0 0 -25 -66.7 0 -18.3
23 HFC Bank (Ghana) Limited HFC 2.3 0 113.3 68.4 -43.8 -15.6 24.5
24 Mega African Capital Limited MAC N/A N/A N/A N/A 33.3 0 N/A
25 Mechanical Lloyd Company Limited MLC 10 36.4 153.3 -26.3 -32.1 -21.1 22.0
26 Produce Buying Company Limited PBC 92.3 -28 -5.6 -29.4 -16.7 -40 -23.9
27 Pioneer Kitchenware Limited PKL -14.3 0 0 0 -16.7 0 -3.3
28 PZ Cussons Ghana Limited PZC N/A -25 338.9 -62 13.3 -35.3 46.0
29 Standard Chartered Bank (GH) Ltd. SCB 0.7 -74.7 29.9 36.2 -19.9 -25.2 -10.7
30 Standard Chartered Bank (GH) Ltd. (Prefrence shares) SCB PREF 0 0 0 5.8 29.1 5.6 8.1
31 Societe Generale Ghana Limited SOGEGH (Formally SG-SSB) -28.1 2.1 56.3 33.3 -20 -22.5 9.8
32 SIC Insurance Company Limited SIC -7 -15 14.7 -5.1 -62.2 -14.3 -16.4
33 Starwin Products Limited SPL -40 66.7 -20 -50 100 -25 14.3
34 Sam Woode Limited SWL 0 0 50 33.3 0 0 16.7
35 Trust Bank (Gambia) Limited TBL -69.9 0 -12.5 -31.4 54.2 -29.7 -3.9
36 Tullow Oil Plc TLW N/A 22.7 -8.1 0 -6 -18.3 -1.9
37 Total Petroleum Ghana Limited TOTAL 98.3 18.5 N/A 20.6 -16.4 -61.2 N/A
38 Transol Solutions Ghana Limited TRANSOL -28.6 -20 -25 0 0 0 -9
39 Unilever Ghana Limited UNIL 16.7 28.3 114.9 -41.6 -20.6 0.1 16.2
40 UT Bank Ghana Limited UTB 14.3 18.8 18.4 -44.4 -60 -70 -27.4

*N/A: Not available, mainly because the company was not listed on the stock market by then

Performance of stocks: Brief observations

According to the data above, the performance of stocks for most listed companies has not been encouraging over the six-year period. For instance, African Champion Industries Limited (ACI), Clydestone Ghana Limited (CLYD), Golden Star Resources Limited (GSR), Golden Web Limited (GWEB), and Transol Solutions Ghana Limited (TRANSOL) never recorded a single positive return throughout the period. Moreover, their latest 5-year average returns were -28.7%, -5%, -6.4%, -18.3% and –9% respectively.

Another key observation from the data has to do with stock volatility. Even though some stocks depict impressive average returns for the latest five-year period, the trend of their annual returns appears to be erratic. A typical example is Aluworks Limited. According to the data, Aluworks’ 5-year average return (95.7%) was contributed by the sole remarkable return (600%) it recorded in 2015. PZ Cussons similarly posted a 5-year average return of 46% which was mainly due to the 338.9% it recorded in 2013.

On the other hand, some listed companies have been consistent in good shape over the six-year period. A few of these stocks, according to the data, include Benso Oil Palm Plantation Limited (BOPP), Ghana Oil Company Limited (GOIL) and Fan Milk Limited (FML). BOPP recorded negative returns for two years (2015 & 2016) and positive returns for the rest of the four years. It further posted a 5-year average return of 25.7%. Similarly, Fan Milk Ltd recorded negative returns in 2011 and 2014, positive returns for the rest of the four years and a splendid 5-year average return of 41.6%. GOIL recorded only one negative return in 2016, with a 5-year average return of 33.7%.

In terms of industrial sectors, the banking and finance stocks seem to perform better than stocks of other sectors. A few studies show that the well-being of an organisation’s industrial sector may impact the performance of its stock. It is due to this reason why investors are advised to invest in industries they are familiar with. Thus, it may be beneficial to look further and compare the performance of stocks according to their industrial sectors. Refer to this link for the historical returns of stocks categorised by their various industrial sectors.

It is essential to note that stocks’ returns based on their price appreciation alone may not constitute their total performance. This is because other factors such as dividend payments and any bonus shares issued by the companies can also be considered. In spite of this, stocks’ returns play key role in terms of their performance rating. At least, we know that the rate of dividend payments by most companies is fairly low as compared to returns on stocks.

Furthermore, one must be cautious when utilising historical results for any financial decision. Although many financial analysts depend much on historical performance of stocks, a few veteran investors caution on such practices. For instance, Warren Buffet once argued that:

If past history was all there was to the game, the richest people would be librarians.”

In a nutshell, even though historical results may not guarantee the future performance of stocks, they may still aid investors to have a clear picture of what is happening on the stock market.