NSE Shakeout Leads To Low Valuation Ahead Of Earnings Season

The nation’s equity market in the last three weeks has recorded a mixed performance after rallying for four consecutive months to a five-year high at 45,092.83 basis in January 19, 2018 due to impressive Q3 numbers released in October. The numbers were considered good enough to reverse the two previous months of pullback, helped also be the influx of positive economic data, increasing foreign inflows and supporting activities in the last quarter of 2017 all of which boosted market and economic recovery that overflowed into 2018. So strong was the positive momentum that it wiped away what has come to be known as the January effect (when the market always closed red) for the first time in 15 years. The NSE recorded all of 15% growth in January.
It is therefore not unexpected, just as in any stock market of across the globe that profit taking would happen, leading naturally to panic selling that became the order of the day. This pulled down the market in the last trading week of January, before rebounding in the following week and experiencing five straight days of correction last week. The correction mode was triggered by the long awaited pullback in the developed markets which happened in the U.S last week, from where it spread into Europe, Asia and other emerging markets.
The benefit of this correction, especially for the Nigerian market is valuation, at a time many companies had recorded their 52-week highs a few weeks ago. With the pullbacks in last three weeks however, the NSE’s 12-month trailing P/E (Price/Earnings) ratio that had stretched above 18 at the end of January is now seating below 17 at 16.20. For as long as earnings remain strong, any price decline in the market will cause further declines in the P/E, boosting dividend yield as 2017 declaration earnings reporting season is around the corner.
In our latest update, we use the chart below, showing the NSEASI’s 10-day advance/decline (A/D) line over the last year. If you are unfamiliar with the term 10-day A/D line. It is simply a rolling 10-day total of the net number of stocks in the composite index rising and falling on daily basis. When the line is looking up, this means more stocks are gaining and at the same time rising, while when the line is looking down, it is a sign that more stocks are falling or losing.
Over the course of three weeks of mixed performance, since the All Share Index closed high on January 19, 2018, the 10-Day A/D line has seen an outright free fall, pulling back to levels where it started this year’s rally to offer investors and traders opportunities to reposition ahead of the coming earnings season, when strong earnings of individual stocks will influence their prices positively depending payout ratios and market reactions to such.
The NSE Composite index is currently down about 4.36% from its 52 week high, but the average stock in the market is now down 10.34% from its respective 52-week high. That may look like a wide divergence, but it is actually pretty common for individual stocks reading to be much lower than the index owing to the fact that not all stocks hit 52-week highs at the same time with the index. In fact, you hardly even see a third of stocks hit an all high on the same day. While the average stock was down 10.34%, the vast majority of stocks are down less than the average -56 to be exact.
Of those 56, 23 are still down less than 6% from their respective highs. So who is currently the biggest decliner in the market? The price performance chart shows that they are low cap stocks which had suffered losses due to the new pricing rule on the exchange.
Consolidated Hallmark Insurance at the current price of N0.35, is down by 30% from its 52 week high, followed by sub-sector peers: Unic Insurance and Lasaco Assurance, as well as ABC Transport that were down by 28%, 28% and 22% respectively to close Friday’s trading session at N0.36, N0.36 and N0.39.
On the upside, shares of Unity Bank have been holding up better than any other stock on the exchange, as it hit new 52-week high, after gaining 232.73% year-to-date.
The end of the correction is already in sight as buying pressure is gradually looking up. The current downturn for Nigeria’s stock market is limited to these levels based on technicals as the economic and market fundamentals remain strong and positive with improving economic activity as revealed by the recent Purchasing Managers’ Index that remains above 50 points at 57.3 point in January, according to data by the Central Bank of Nigeria (CBN) report.