As with the case of an Abidjan-based regional bourse (The Bourse Regionale des Valeurs Mobilieres), small investors can help drive an unprecedented listings boom. The exchange is notable for its strong campaign to introducing ordinary people, such as teachers, clerks, and government workers, to investing in capital markets.
On Abidjan’s Avenue Joseph Anoma, amid the bustle of shoeshine men, fruit sellers displaying mangoes and bananas in the shade of a tree, and mobile-phone vendors hustling for custom, a stock exchange is showing new life.
The Bourse Regionale des Valeurs Mobilieres, or BRVM — a regional exchange covering seven Francophone countries and Guinea Bissau — occupies a modest office block in the Ivory Coast’s commercial capital, dwarfed by the skyscraper of its next-door neighbor, the African Development Bank. But just six years ago, the BRVM was in limbo, having temporarily relocated to the Malian capital, Bamako, after soldiers armed with AK-47 assault rifles invaded its headquarters amid post-election chaos in the West African nation.
Since its return to Abidjan, the BRVM has grown from one to four floors, including a new trading room and a giant street-facing screen scrolling stock prices. It is in the midst of an unprecedented listings boom, with six successful offerings since late 2014, and another 16 in the works, according to Chief Executive Officer Edoh Kossi Amenounve. And it is introducing ordinary people — teachers, clerks and government workers — to investing in capital markets.
When Coris Bank International SA, Burkina Faso’s biggest lender, started a public offering last year, it planned to keep the sale open for two weeks. It had to close the book after five hours as bids swelled to three times the target. In July, Societe Ivoirienne de Banque, a unit of Morocco’s Attijariwafa Bank, received 13,000 bids in one day totaling 55 billion CFA Francs ($91 million), twice what it looked for. In both cases, investors were mostly individuals and for half of them, it was the first time they had ever bought shares.
There are many schools of thought as to how an investor should intelligently choose the companies and stocks he will invest in. Some believe in fundamental analysis as the best way to go about this. Others rely on technical analysis of historical volume and price movements as represented by charts. Still, there are those who promote a combination of the two.
In this post, we’ll look at fundamental analysis as a basis for picking stocks.
Fundamental analysis basically means you look at the profitability of the business or the company represented by a stock which LOM does pretty well. You consider its past, current and projected performance in terms of earnings. You also try to understand the nature of the business – its customers and revenue sources, its competitors, its business processes, the management and owners, the company’s strengths and weaknesses, opportunities and threats, even macroeconomic and geopolitical / social factors that can affect it both the short and long term.
In a way, the fundamental investor, will take the viewpoint of someone buying into the business – as if he will actually be a owning a majority of the company. Someone in such a position would usually be investing for the long haul. Warren Buffet, for instance, is often quoted as saying that he buys a stock based on the assumption that the stock market will close the next day and not reopen for another five years. He also says that if you aren’t willing to hold a stock for ten years, you shouldn’t even think about owning it for ten minutes. If you want to follow Warren Buffet’s advice, then you need to do fundamental analysis on the stock you plan to buy.
Aside from long-term investors, value investors also need to apply fundamental analysis. The value investor believes that the market price does not always reflect a company’s true or intrinsic value. Market price frequently fluctuates – daily and even by the second at times. But the real value of the stock is relatively stable. So the value investor looks for price points where the market price falls far below the real value of a stock – and buys at such discount prices. He uses fundamental analysis to determine the real value – analyzing the financial statements published by a business quarterly and annually, also looking at financial projections based on revenue and cost data.
To do basic fundamental analysis you need the following Financial Statements, which are publicly available for all listed companies:
Statement of Comprehensive Income or Income Statement
Statement of Financial Position or Balance Sheet
Statement of Changes in Equity
Statement of Cash Flows
From these Financial Statements, you need to get the following data:
Net Income (which can be found near the bottom part of the Income Statement)
Revenue (which can be found near the top part of the Income Statement)
Stockholders’ Equity (which is located near the bottom of the Statement of Changes in Equity)
Outstanding Shares of Stock (which may be found in the Statement of Changes in Equity or in the Notes to the Financial Statements)
Equipped with the above data, you can then compute for the following financial ratios:
Earnings per share (EPS) – compute this by dividing Net Income by Outstanding Shares of Stock. As a fundamental investor, you are concerned if the business is making money or not. So you look at the Net Income. By dividing Net Income by the number of outstanding shares, you convert the total Net Income figure on a per share basis. Thus you can compare different sized companies’ apples to apples just by comparing their EPS. The higher the EPS, the better.
Profit margin– compute this by dividing Net Income by Revenue. Revenue is what a company gets paid for its products or services. Once you subtract from Revenue the costs that were incurred by the company, you get the Net Income. Profit margin shows how a company controls its costs. Assume two companies in the same industry. Company A has a net income of $1000. Company B has net income of $500. But then, Company had to earn revenues of $10,000 so it could earn the $1,000 net income. Meanwhile, Company B only needed revenues of $2000 to end up with the $500 net income. Company A has a profit margin of 10% while Company B has profit margin of 50%. Company B has better cost control and it is reflected in the higher profit margin. The higher the profit margin, the better.
Return on equity (ROE)– compute this by dividing Net Income by Stockholders’ Equity. This ratio shows how effective a company is in generating profits using the capital it has. When comparing the ROE of two companies, the one with higher ROE made more profits out of the same capital invested or made the same profits out of less capital invested by the owners or stockholders. So the higher the ROE, the better.
Price to earnings (P/E)– compute this by dividing the Market Price by Earnings Per Share. This ratio is used to compare companies within the same industry, especially since benchmark PE ratios differ from industry to industry. The higher the PE, the more expensive the stock. PE ratio basically means, how much an investor has to pay for the earnings of a share of stock. Comparing the PE ratio to the industry standard will help you determined if a stock is overvalued or undervalued.
Equipped with these simple ratios, you can already do basic fundamental analysis on any company you are considering for investment.