Rakeli Gichuki and Wambui Mukundi
Market
analysis is an acquired taste. It is usually not a love at first sight kind of
affair for those of us who are not in this kind of field. The study of markets
demands a lot of respect and commitment if one is able to understand it and
actually make financial gains from the practice. It is part hard science and
part art and the information/tips outlined in this article are nowhere near
exhaustive.
Earnings Release
In
an ideal world, company earnings should affect the stock price in a manner that
is more or less predictable. However, the stock market is most of the time not
ideal and the cardinal rule is not to react to pieces of information in
isolation. Ideally, when company’s earnings releases are impressive, the stock
price is supposed to go up after a certain period of time. This is because the
forces of supply and demand apply as they would in a perfect commodity market economy,
which is, when the demand is greater than supply the prices increase and the
supply is greater than demand, prices usually tend to fall.
Therefore,
when the company earnings are impressive, then the demand may become greater
than supply thus leading to a spiking of the stock price. This kind of analysis
is purely focused on effect of investor sentiments on the stock price. It is
important to note that, the stock price is not a reflection on the company’s
value. The company’s value is calculated by multiplying the stock price by the
number of outstanding shares, and there are instances when companies with a
higher stock price have a low value.
Therefore,
even though a company has impressive earnings release, what determines the
ultimate stock price of the company is the investors’ sentiment through the
forces of demand and supply.
Mergers and Acquisitions (M&A)
When
a company is acquired by another company, the stock price of the acquiring
company goes down due to the premium costs of the acquisition while the target
company’s stock will rise. All these price movements happen in the short term.
In the long run however, an acquisition is a lucrative venture for the
acquiring company.
There
are situations in which a private company acquires a listed company. This is
called a reverse acquisition or merger, according to the particular
circumstances. The main aim of a reversed acquisition (or merger) is for the
private company to become a public listed company without going through the long
process of listing and the risk of dilution of share value. A good example in Kenya was in 2012 when +I&M Bank Ltd was able to become a listed company through
a merger with City Trust. In this kind of agreement, I&M provided its
own stock as consideration for the City Trust shares. In other words, I&M acquired
majority shareholding in City Trust by trading its own shares. What happened
next was that I&M became a listed company, before the completion of the
merger, City Trust share price spiked temporarily.
We
cannot exhaustively outline all the scenarios related to the effect of share
price after mergers and acquisition of course for the obvious reasons that they
vary according the particular case in question. However, it is important for
the investors to be alert as to the reasons behind the M&A in order to make
a smart investment decision.
Dividends
When
looking at dividends, it is important to evaluate dividend as a percentage of
share price, by dividing the dividends per share with the price per share, in
order to follow an option with a stronger dividend yield. This is because a
focus on the dividend amount that is being paid out by a particular company
maybe misleading. For instance, company O may be offering a dividend of 15
shillings per share with the stock trading at 300 shillings. Company F on the
other hand is offering 5 shillings per share with its stock trading at 50
shillings. Company dividend yield is 5% while Company F is 10% meaning a smart
investor will go with the latter as it has a higher yield.
Further,
companies that pay out dividends are more stable than companies that do not.
Layoffs
Different
companies have different reasons for lying off its employees. Some Layoffs are
usually as a result acquiring of a new technology, that declares some employees
redundant, or cost cutting measures, part of a company restructuring or even
after a job
evaluation exercise. Ideally, layoffs are good for a listed company as it
reduces salary expenses and this should help increase the earnings. Sometimes
layoffs are interpreted, as a sign that the company is not doing well and
therefore may lead to a decline in the stock prize especially short-term
However, the reason behind the layoff or at least the public’s interpretation
of the same is what determines its effect on the stock price. It is therefore
important to check the politics surrounding layoffs before purchasing the stock
in the company. Some lay off also come with massive lawsuits from aggrieved
ex-employees and sometimes class
action suits, which known to drain resources of companies. In Kenya, +Kenya Airways laid off many of its workers as part of its strategic plan. During this
period, there was a drop in their share price then later regained its position.
While we are not saying that, our research revealed a direct correlation to the
layoff it may have had some play.
New products
Purchase,
sale or call back of a product of a listed company has an effect on the share
price of the said product. Purchase of new product may mean a decline of the
share price especially if the product consumes a large amount of the company’s
resources. However, for the long term the product could be advantageous for the
operations of the company. The effect of such information on the share price
will depend on how that affects the immediate and future earning of the company
as well as the public’s interpretation of the information. Just recently, +Safaricom announced its planned acquisition
of some assets from Essar Telecommunications Limited. Its directors
expected the multi-billion shillings deal to have effect on its share price.
This information was disclosed at the beginning of March this year when the
share price was 11.65 shillings. Thereafter the share price gradually rose to 12.35
shillings in mid March. The rise continued with slight declines now and then to
close at 13.0 shillings as at 19th May 2014. While Safaricom has made many
announcements in between that analysed period, it is our opinion that the
information had a play in the increase in the share price.
Company scandals
Scandals
involving listed companies depict the securities markets in a bad light.
Corruption and such other activities contrary the principles of corporate
governance diminish investor confidence in the securities markets generally and
in the company involved in the suspect act. In Kenya such scandals were
witnessed in 2006 with the allegations of Insider trading
against David Kibaru the then CEO of +Uchumi Supermarkets. The same was also was
observed Later in the fraud and tax
evasion allegations against CMC Holdings
later the suspension of several of its directors. While the companies
may later recover from the scandal as the case was with Uchumi, it takes a
while for before the members of the public can gain confidence to invest in the
involved companies.
Conclusion
If
you think by now you completely understand the stock market, you have probably not been paying
attention :)
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