Buying low-priced stocks: The benefits we underrate

low-priced stocks

Basically, listed companies on the stock market can be placed under two categories in terms of their share prices. On one side, there is the category of stocks that trade at comparatively high price per share. On the other side, there is another category that fairly trade at low price per share. One deliberation when it comes to stock trading is the decision on whether to purchase low-priced stocks or high-priced stocks. A few investors argue that buying low-priced stocks comes with many benefits. For instance, Warren Buffett, a veteran investor, argues that:

The key to successful investing is to buy low, [and] sell high.

Low-priced stocks may however not be necessarily cheap. In other words, it is important to look beyond the mere cheap price of a stock. This is because a number of factors can contribute to how high or low a stock price can be. For example, during stock split (when an institution decides to divide its existing shares into multiples), the price per each of the divided shares reduces by default while their values remain unchanged. When the shares of an institution become undervalued, it can also lead to a low-priced stock. Undervalued stocks are stocks that are sold at prices presumed to be below their true intrinsic value.

Due to the above contributing factors, using only the market price of a stock to determine its worth may be sometimes deceptive. In fact, some stocks may not be even worth the low price being paid for. For instance, cheap stocks that post fewer earnings may turn out to be costly if their price-to-earnings (P/E) ratio is high. Note that in general, the higher the P/E ratio, the more expensive the stock. The Ghana Stock Exchange publishes P/E ratios of the various listed stocks on its website. Recognising the underlying (or intrinsic) value of a stock when making decision on low-priced stocks would be useful.

Now, before we begin to list some of the benefits of buying low-priced stocks, we should bear in mind that buying low-priced stocks may also come with some downsides. In the meantime, let’s focus on their upsides.

 

  1. Lower initial investment

Low-priced stocks offer investors the opportunity to start with minimal amounts. This is particularly beneficial for low income earners as well as new investors who may not have that much to begin with. Besides, it makes it easier for one to invest as much of his investible money as possible. Remember that shares are bought in wholes, not in fractions. For instance, you cannot purchase 2.5 shares of a company’s stocks. Neither can you purchase 2.99 units of shares from the stock market- You are allowed to purchase in whole numbers such as 2 shares, 3 shares, etc. Let’s assume that you have only GH¢50 at your disposal to purchase some stocks on the GSE. With this amount, you can only afford one share of AGA (AngloGold Ashanti Limited) which is currently traded at GH¢37 per share. Thus, the remaining GH¢13 may be left idly. Meanwhile, the same GH¢50 could purchase 55 shares of CAL bank stocks (currently traded at GH¢0.9 per share), leaving just GH¢0.5 unused. In effect, low-priced stocks can offer maximum utilisation of one’s investment.

 

  1. High potential for growth

Low-priced stocks, in particular, undervalued stocks, appear to have greater potential for growth. In general, it is likely for the share price of a low-priced stock to rise steeply if the company comes out with something favourable. This places its shareholders in good position to make some gains. With any slightest increase in share price, investors owning more stocks stand a greater chance to increase their returns. For example, an investor with GH¢500 can purchase 10,000 shares of a stock priced at GH¢0.05 If the share price of this stock increases by 0.01 to GH¢0.06, the investor’s stock value would be GH¢600 (that is, 10000×0.06). This would be 20% appreciation from the original purchase price. In comparison, if an investor use the same GH¢500 to purchase 100 shares of a stock priced at GH¢5, he may not achieve similar results when the price of the stock appreciates by 0.01. In this instance, the value of the investor’s stocks would be GH¢501 (that is, 100×5.01), representing just a 0.2% appreciation.

It may also be important to note that not all low-priced stocks have the potential to appreciate exponentially at a given time. Moreover, the price movement of a few low-priced stocks tend to be erratic and risky. A typical example is CPC (Cocoa Processing Company) stock, known to be one of the low-priced stocks on the Ghana Stock Exchange. In fact, the share price of CPC can increase or drop by 50% within a particular trading day. Over the past five years, CPC stock (currently priced at GH¢0.02/share) has periodically enjoyed substantial [±50%] price movements within some particular years. Notwithstanding these significant movements, the opening and closing prices of CPC stock have remained unchanged in each of the individual years (since 2011). In effect, in terms of annual returns, CPC stock has recorded 0% from 2011 to 2016.

  1. The potential for high dividend earnings

Dividends are paid on each share held by a shareholder. This means that the higher the number of shares owned, the higher the earnings derived from dividends. All things being equal, as stock prices fall, they become cheaper to buy. Thus, you get the chance to buy an investment at a bargain rate. Low-priced stocks offer you the advantage of acquiring increased number of shares at the same monetary value. Let’s have a look at the example below:

Two investors, Gadasu and Ashai, both had GH¢1,000 at their disposal to purchase some stocks on the Ghana Stock Exchange. They both settled on purchasing shares of Societe Generale Ghana Limited (SOGEGH). However, Gadasu completed his purchase on 31st December 2014 while Ashai bought his shares two years later, on 30th December 2016. The price per share of SOGEGH on 31st December 2014 and 30th December 2016 was GH¢1 and GH¢0.62 respectively. Hence, with the GH¢1000, Gadasu possessed 1000 shares while Ashai owned 1612 shares of SOGEGH.

Now, in May 2017, Societe Generale paid a dividend of GH¢0.033/share to each qualified shareholder.  Gadasu and Ashai therefore earned GH¢33 and GH¢53.2 respectively from the dividend pay-outs.

It can be deduced from the above example that the low price of SOGEGH stock in 2016 gave Ashai the advantage to acquire more number of shares compared to what Gadasu attained in 2014. Ashai’s increased number of shares therefore made him earn more in dividends than Gadasu even though they equally invested GH¢1000. Unfortunately, not all companies follow a regular pattern of dividend payments. Furthermore, the dividend yield of many stocks may be considered too low. Thus, the advantage of earning more dividends from low-priced stocks may not be practical for all stocks.

 

  1. Improved diversification

Diversification continues to be a common term in the investment world due to the associated positive outcomes. Earlier in this post, it was mentioned that low-priced stocks make it affordable for investors to start with minimal amounts of money. The affordability factor allows investors to be able to invest a small amount of money in a diversified portfolio. Now, imagine a low-income earner who wish to invest GH¢50 in a diversified stock portfolio. If this investor selects Anglogold Ashanti (AGA) as one of his stock picks, he may end up spending almost all his GH¢50 on just a single share of AGA since one share of AGA is priced at about GH¢37. On the other hand, the investor may be able to purchase a mix of stocks comprising CAL bank (currently priced at about GH¢0.9), SOGEGH (currently priced at GH¢0.75) and probably GOIL (currently priced at GH¢2.29). For example, out of the GH¢50, he could spend GH¢20 on 22 CAL shares, GH¢10 on 13 shares of SOGEGH and GH¢20 on 8 shares of GOIL. This therefore gives the investor the opportunity to reap many of the benefits associated with investment diversification.



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.