The equity market has stayed in the tight clutches of the bears for most of 2021, birthing an understandable level of disinterest by both local and foreign investors alike. On the foreign end, the positive impact of a bullish oil market was overridden by the looming FX concerns and other structural problems that pose as dominant downside risks to broader economic growth.
Likewise, local participants, which consist majorly of Pension Fund Administrators, have found comfort in bank placements and fixed income investments, given that the attractive yields on these fixed return investments disincentivize investments in variable return assets with higher levels of volatility.
Accordingly, save for a few bargain hunting opportunities every now and then, the broad theme of the market has been largely bearish. However, the market recently moved into a new phase, where neither the market bulls nor bears have a significant hold of performance.
What we are observing now is the interaction of an unenthusiastic buy and sell-side, which has left the market more susceptible to price movements in largely capitalized stocks on the exchange.
Fixed income yields pose no significant threat to equity performance in the near term as the equity market seems to have shrugged off the impact of yield movements in the T-bills market and activities around the half-year earnings season is likely to be subdued. The equity market will always have bullish and bearish periods, but the uncertainty is what blights investors.
Nonetheless, cherry-picking stocks of viable companies will always prove useful, as they can easily sit out a market storm or ride an upswing. While short to mid-term strategies come with higher levels of risk given the speculative tactics required, a more plausible approach to equity investing in the context of the prevailing market atmosphere is defaulting to a fundamentalist portfolio, by selecting stocks that possess intrinsic soundness.
The selection of these stocks will not necessarily follow a thematic pattern, as the focus will be directed to the specific opportunities that exist within certain stocks, which in turn allows them to offer decent returns through yields on dividends paid and via capital appreciation.
Stocks in the list must be insulated from headwinds that could blight the various sectors and overall economy, offering a weighted gain well in excess of available fixed return investments. Accordingly, we have our top 5 stock picks at the close of the market today.
The stock mix cuts across securities in the Food and Beverages, Banking and Cement subsectors, with upside potentials above 25%, and with a history of consistency in dividend payments in at least six of the last seven financial periods. While we give some recognition and consideration to the technical readings as dictated by the price trend, the central basis of the selection largely rests on the position of the stock relative to an intrinsic estimate that captures and reflects the quality of the company’s fundamentals.
This stock is attractively poised to offer meaningful gains in the long-term, benefiting off both macroeconomic tailwinds like the underserved sugar demand market that was worsened by a backward integration economic tactic, and from internal efforts to boost production volumes.
In the first quarter of this year, the company’s production volume was up by 4.3% to 200,783 tonnes, revenue inched up to N67.39 billion indicating an increase of 41.5%, and the Profit Before Tax surged by 25.6% to N11.95 billion, all relative to the levels attained in the corresponding period of 2019.
Also, the fundamental strength is bolstered by its technical attractiveness, with the 14-day relative strength index (RSI) at 26.44. In addition, the firm is relatively attractive with a PE ratio of 7.24x, compared to the industry average of 12.3x.
Zenith Bank was the most profitable bank in 2020, with a very impressive balance sheet size and above adequate capital buffers. The company was one of the highest dividend-yielding stocks last year, and the lender also benefits from an attractive valuation. Zenith’s asset quality, as defined by the non-performing loans is below the regulatory limit of 5.00%, at 4.20%.
Despite a 5.70% dip in the gross earnings in Q1’2021, the lender was able to grow its profit before tax by 5.02% to N53.06 billion, by moderating the cost components in its interest and operational segments. Nonetheless, the remarkable interim and final dividend payments consistently declared over the past years is expected to continue to bode well for the stock.
At the current market price, the stock has a robust upside opportunity of 37.79%. Also, the stock is relatively attractive with a PE ratio of 3.32x compared to an industry average of 4.00x. However, with the RSI tending close to the overbought region at 66.10, we will limit the portfolio exposure to 15%.
Wapco continues to benefit from reasonable expectations of larger spending on infrastructure by both the private and public sectors, given the drive to close the country’s infrastructure deficit. The cement producer is also supported, by corporate restructuring moves particularly with respect to its balance sheet optimization, and by cost reduction strategies. In the first quarter of 2021, the firm reported a 12.2% y/y growth in revenue to N71.5 billion, driven by a 12.3% rise in Cement Sales.
Wapco is the most attractively priced of all cement producers listed on the bourse, with a PE ratio of 10.90x, relative to the African basic materials industry average of 21.7x. At the current market price, the stock offers a descent upside potential of 29.24%.
UBA takes the largest quotient of the portfolio mix at 35%, bolstered largely by its fundamental attractiveness and by its relative cheapness. The lender boasts of a low non-performing loan ratio of 4.70%, robust deposit growth, and industry-best cost of risk at 0.90%.
The decline in the dividend announced in the 2020 financial year has caused investors to ignore the strength of its African business network and its strong interest segment.
Of all tier-one lenders, UBA is one of the most attractively priced based on a price to earnings comparison, with a PE ratio of 2.3x compared to an industry average of 4.00x.
Flourmill is supported by the increasingly inelastic nature of the demand for wheat-based products. Likewise, the protectionist stance of the authorities has been helpful to the firm, as the insufficiency of the supply of our favourite staple food item, rice, has forced consumers in droves to start consuming pasta and other wheat-based products. The firm is one of the largest millers in Nigeria, with a well-diversified business structure.
In the full-year period ended 31st of March 2021, the company’s revenue was up by 34% to an N771.61billion, on the back of improvements in all three major revenue segments (Food, Agro-allied and Sugar).
Also, the stock has a robust upside, and remains relatively attractive with a PE ratio of 4.70x, compared to an industry average of 12.3x.