Stock market decline opens floor for cherry picking

Investors have been decimated this year as the stock returns year to date performance fell 7.49 percent as at noon today. Last week, market dropped 2.9 percent to become the worst weekly market performance since June.

The market rout this year has seen the market fall more than 21 percent from its 52 week high in January, sending the Nigerian equities market into bearish territory. Stocks have declined precipitously as the continued political crisis in this pre-election year continues to rock the capital markets.

Analysts now think the market sell-off this year may have been overdone as companies with strong fundamentals have gotten caught in this bearish trend.

Investors expected that a positive earnings season will help lift stock prices after a disappointing first half of the year for stock performance. Yet stock prices have continued to get bruised in the market today as quarter to date performance is now down -6.78 percent.

As at market close yesterday, four out of the five largest companies on NSE are down more than 18 percent since January 19, they include Dangote Cement (-18.31%), GTBank (-21.44%), Zenith Bank (-20.9%) and Nigeria Breweries (-25.31%). Each of these companies saw their bottom line expand in the first and second quarter this year, yet their share prices were victims of the wave of selloffs that have rocked the Exchange this year.

Other mid cap companies that delivered strong half year earnings results like FBN Holdings, Transcorp, Conoil, Sterling Bank, and FCMB have also seen their stocks drop by more than 30 percent since the January peak, thus opening the door for bargain investors to begin cherry picking these value stocks.

The average price to earnings ratio for 30 of the largest companies on the Nigeria Stock Exchange is now 8.71, making this the cheapest market has ever been since 2009. The dividend indicated yield for NSE 30 has also been rising which could attract dividend investors to return to the market.

As stock prices continue to tumble, the opportunity basket for investors to accumulate lowly valued companies with strong fundamentals will continue to increase. The potential for a massive jump in equity prices continues to get higher the more prices fall as analysts expect a market rebound to begin after the elections are concluded early next year.