Company earnings reports and seasons cannot be over-emphasized in equity investment and trading due to their roles in the up and down movement of share prices in the short to long-term, just as the former determines dividend payouts.
These account for why the share prices of companies with positive earnings and financial performance have rallied in recent times on the Nigerian Exchange (NGX).
In summary, because it is normal for investors to ordinarily expect higher dividend payouts and share price to move northward, resulting in a situation where capital appreciation trails positive performances.
Overall, corporate earnings for audited financials of the 2023 full-year have been mixed as noticed in the releases of several companies so far, which accounts for the mix trend in the market and even profit taking in some stocks. There have, however, been positioning in some others like Nahco, UBA, Zenith Bank, Fidson Healthcare, AXA Mansard, Consolidated Hallmark Insurance, and NEM.
Also, these improved share prices have largely reflected in the year-to-date 36.83% gain in the benchmark All-Share Index, trading above the 102,000 psychological line, after testing 100,492.00 points, ahead of the major resistance level of 106,088.00bps in the process. This rally and mixed sentiments could be linked to investors’ interest in companies that have released positive results, as well as strategic investments in some others within the period, apart from incidences of profit booking.
The numbers released so far through the NGX portal have been mixed, even as some were impressive, and can rightly be tagged “better than expected numbers. ” This is why such numbers have expectedly supported the uptrend seen in their share prices so far. The numbers are also giving market players an insight into how they should position at this time of runaway Inflation and uncertainties that come with higher interest rates to checkmate skyrocketing prices in this post-election year, especially as stocks linked to essential products and services are those providing some kind of safe-havens, capital preservation and growth for investors at such times. These are companies that can increase prices and shift the burden of the harsh economy to the final consumers. A jerk up in prices of products and service at such times is usual, resulting in increased revenue, better profit and share price growth.
Numbers in equity investment are classified into three groups as recognized by fundamentalist and technicians in the market arena.
Numbers that usually emanate, or derive from those provided by quoted companies include Sales revenue, Net Profit, Earnings Per Share, Dividend, Bonus, Net Asset Per Share/Book Value and Profit Margin, etc.
There are those generated by market forces, as a function of the interplay of demand and supply such as: Share Price, Transaction Volume and Deals.
Derived Numbers are generated by the combination of numbers from the companies and the market to give such ratios as Price to Earnings, Price To Sales, Price To Book Value and Dividend Yield, among others.
Investment in stocks require deliberate efforts at ensuring that there are more wins and fewer losses. This is why it is important for investors to know what to do per time, by knowing the seasons and times the market is in and what to do at each point.
There are seasons and times in every stock markets of the world. There is the earnings season when results are released. This happens at least four times a year, broken down into three quarterly (mostly unaudited), and one (audited) full-year results.
There is the bullish season when prices are generally up, even if there are no results being released, as well as the bearish season, when prices are generally depressed. For sure, there are other periods when the market trends sideways, which is that time when the market is neither bullish nor bearish, but looking out for direction, or some hint from the fiscal or monetary authorities.
WHAT YOU NEED TO KNOW WHEN TRADING EARNINGS
It is important to know how consistently these companies release their report. The trend of the earnings (increasing or decreasing). If increasing, you need to determine the significance in either direction, in addition to knowing the company’s financial year-end. There is the Earnings release date which is very crucial, as companies with high corporate governance keep to this vital aspect of their post-listing requirements.
Quality of earnings. Is it weighed down by excessive costs or expenses? Qualification and closure dates (if mark down and the company’s expected quarterly earnings is likely to beat market forecast). Market hearsay (feelers from the market and/or rumour). As an investor or trader, you can buy into the rumour and sell the news when it hits the market. Also, there are Other information.
HOW TO PROFIT FROM TRADING EARNINGS
As long as every quoted company releases its quarterlies on a three-month basis, it is the performance rate that actually influences the share price which reflects on the chart for technical and fundamental analysts to see. The “buy into the rumour and sell the news” slogan can also be applied very profitably to rumours that a company will report earnings higher than expected. The idea is to buy the stock early when there is a mere rumour of “good news” begins to spread. Then you sell the stock immediately the rumour becomes a reality.
THE STRATEGY
Identify the expected release date of a target company that has a good track record of releasing positive earnings regularly, with the expectation that the company will beat market forecast in the next quarterly or at full-year. How early or late the earning will hit the market will help you know exactly when to exit the position and the risk level associated with the trade. Two to three weeks to the expected date of the earnings release, check the stock’s chart to see if it is trending higher or bouncing from a recent dip in price. Here you can set a price limit and use a prudent position to also guide the volume of shares to buy. Position early and then wait as the price rises due to the anticipated positive earnings report. Check the price action daily. Sell for a profit when the price rallies as a result of reactions to positive earning released that hit the market. Make sure earnings of the company you want to trade has a positive projection. Know what analysts and the market generally are expecting. If short of your projection and market forecast, please sell immediately. When company financials are released, the key financial ratios to focus on are: growth in net profit, Earnings Per Share, Dividend and operational cash flow.
So, for you to invest well in stocks, seek to get hold of what the company’s earnings always look like. Is it improving yearly or quarterly? Is it declining, fluctuating or stagnant? You need to sieve this information yourself. It is extremely dangerous investing in stocks of companies without results.
In a correcting market like the NGX Exchange currently, where PE ratio is still relatively low due to relatively strong earnings, investors should think medium and long. But when opportunity for short-term profit comes, take it. We note that as the market is recovering also it is changing due to reforms and investors/traders’ perception. Investors and traders at this point should combine Fundamental and Technical Analyses to better their investment decisions for profitable trading.
To navigate the rest of the quarter and beyond profitably using fundamental and technical analyses to run, join investdata’s Live Sessions at noon every Monday, Wednesday and Friday, “and also get investdata’s technical toolbox to play. The current state of the market suggests that discerning investors are gradually becoming greedy, while others are fearful, as seen in the recent Ranging market.
Despite the oscillating volume of transaction witnessed in recent times, it is time to go shopping for undervalued stocks, sectors and the next insider playing opportunity.
Ambrose Omordion
CRO|Investdata Consulting Ltd
ambrose.o@investdataonline.com
Tel: 08028164085, 08032055467
