Watch firm CEO and the cash pile in picking stocks

By GEORGE BODO

The year has barely moved and stocks are already posting some eye-rolling negative returns. It’s just four weeks into the year and the continent’s 13 leading stock markets have seen five per cent chopped off stock prices on average terms.

Leading the chopping board so far is Nigeria, whose stocks are already down 17 per cent, even prompting the Government, a couple of days ago, to call for a sit-down with capital markets stakeholders — ostensibly to discuss ways of calming investors’ nerves.

Kenyan stocks on the other hand have posted the fourth worst performance so far, with prices down six per cent since the year began.

It’s really difficult to exhaustively and conclusively rationalise the current selling stampede — apart from the fact that China keeps popping up in every commentator’s lips (billionaire investor George Soros is the latest to join the chorus).

It’s even getting difficult to explain the current tight correlation between the crash in global oil prices and stock market sell-offs. That correlation has never been this tight before.

We’ll wait for the academics to give us some papers on the current phenomenon.

While we are waiting, how do you pick stocks in the current turmoil? In a turmoil like this, you don’t just pick stocks; you cherry-pick. And I suggest that you do so guided by some three cardinal pointers.

First is strong leadership. I recently watched a market commentator across the Atlantic highlight this as a key stock-picking incentive, especially in the current market turmoil and I thought it made a great deal of sense.

Look at it this way: last year, a record 17 listed companies at the Nairobi Securities Exchange issued profit warnings.

Just how much do you trust the current management to lead the company out of whatever rough patches it is going through? If your trust is very low then don’t expose yourself to that stock, and the converse applies.

Second is cash position. I know five blue-chip stocks that have been severely punished by the market because of sitting in precarious cash positions.

Biggest challenges

This year, one of the biggest challenges for companies will be cost of financing their activities — either working capital or capital expenditure (capex) financing, whether foreign or local currency, and for obvious reasons.

If you come across an unfairly punished stock operating in a cash-intensive sector but sitting on a healthy cash position, be contrarian and pick the stock(s).

Healthy cash position can mean the ability to expand capacity without resorting to expensive capex financing, easily acquire a distressed rival or even sustain a healthy dividend payout for some time