How To Identify High-Profit Stocks For In The Nigerian Stock Market In 2023.
The Nigerian stock market (the stock market of the Nigerian Exchange Limited-NGX) maintained a positive momentum within the first nine months of 2022, gaining N4.15 trillion.
Globally, most stock exchanges have witnessed severe volatility.
NGX market capitalization had opened in 2022 at N22.297 trillion, gaining N4.15 trillion or 18.63 percent to close at N26.451trillion as of September 30, 2022, according to a report by Thisday.
Usually, investors in the capital markets always try to figure out when the stock market will record a bullish trend, and changes in market sentiment cause investors to act in different ways. Smarter investors mop up stocks in bearish markets and wait for the bullish market to return.
At the moment, some investors are considering buying stocks in a big way. Some have already taken the plunge. Others are cautious, buying stocks selectively and in small amounts. Yet others are keen to invest only if the markets correct some more.
Most investors who are either buying stocks now or are thinking of doing so in the near future have a long-term horizon. This is a good thing. It’s the first step to investing successfully in this market. Short-term investors are speculators and speculation is akin to gambling.
Unless there is a quick and strong market recovery, short-term investors are unlikely to make a lot of money. Thus being a long-term investor is the way to go.
But that’s just the first step. It is important to identify the best stocks in the market and invest.
If you’re looking for the best stocks for 2023 and beyond, you will need to diligently follow a solid process to find them. And you will also need to buy them at reasonable valuations.
In this article we will look at the process you should follow to identify high-profit stocks for 2023.
Debt
It’s always a good idea to start with the debt levels of the company you are considering. In other words, you should investigate and study the company’s financials.
Ideally, the company you want to invest in its stocks should have very little debt or should be debt free. Many fundamentally strong stocks have zero debt.
Also, it’s a good idea to look for companies that are actively reducing their debt. While they may have some debt today, they are unlikely to be badly affected by rising interest rates.
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Dividends
Next, you should check the dividend payout.
The fundamentally strongest companies have rock-solid cash flows. They often share this cash with investors as dividends. The best companies usually have a long track record of dividend payments.
In a stock market downturn, dividend-paying stocks are in high demand as investors prefer the safety of the cash flow that dividends provide over capital gains.
These stocks can also provide good dividend yields during a market crash. This is because they tend to fall initially along with the rest of the market. But as soon as their yields become attractive enough, investors jump in and buy them.
This means high dividend-paying stocks have an in-built stop loss.
There are also excellent companies that raise their dividends every year. In these stocks, you get the benefit of capital appreciation as well as rising dividends. They are called dividend growth stocks.
Growth
Companies that maintain good sales and profit growth during a stock market downturn as always in demand. Check for good growth in the top line and bottom line. The higher the better.
The market knows these stocks are essentially getting cheaper. This is because high growth increases per-share earnings at a fast pace. This, combined with a falling market makes these stocks attractively valued. At a certain point, deep-pocketed investors start buying these stocks.
Fast-growing stocks get to this point sooner than slow-growing stocks. Unfortunately, these stocks tend to be overvalued at the start of the correction, so they have more downside.
It’s a waiting game with high-growth stocks. If you invest too soon you may end up buying the stock before its valuation has corrected sufficiently.
But if you are patient, the stock market will present you with a golden opportunity to buy these stocks at a great price.
Previous Track Record
Looking at the previous performance of a stock in the past is very important even though no investor makes profits in the past. The past is a good guide.
If a stock has been a multibagger(an equity stock that gives a return of more than 100%) in the past, it’s worth checking out if it was driven by fundamental reasons or by speculation.
If the reason was strong fundamentals, and those fundamentals are still intact, you could have a multibagger stock on your hands.
Return On Equity
The return on equity is one of the best measures of a quality company. If you rigorously filter out low ROE stocks, you will get a list of stocks with high ROE.
A high return on equity along with low debt is a great combination to focus on when looking for stocks with the best fundamentals.
All great long-term stocks have good ROE. Just be sure to use it along with metrics like high growth and low debt.
Perhaps you may have heard of 20-20-20 stocks. These are an elite group of stocks with minimum 20% sales growth, 20% profit margin, and 20% ROE.
With this checklist, you are already ahead of 90% of investors in the stock market. It won’t take you long to identify the best stocks to put on your watchlist for 2023.
Happy investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
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