How decide which shares to buy at the stock market

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

26 November 2017

Mary Wanyoike says that she has been planning to start investing in shares at the Nairobi Securities Exchange (NSE) but has not started because she doesn’t know which companies to buy. To her credit, she opened an account with one of the stock brokers “but it has remained dormant for so long”. Therefore she asks: “I want to start with just Sh5,000. Which company can you recommend?”

Instead of giving an answer, I prefer to show Mary how to get it for herself – that is, teach her how to fish instead of giving her a fish. So here we go.

“Normal trades” at the NSE are done in blocks of 100 shares. If you want to buy less than 100, your order will be booked under “odd lots” and it can take a very long time to be executed.

Therefore, by dividing Sh5,000 by 100 shares, we find that the best choice for Mary should be those companies whose prices are Sh50 and below. There are about 50 companies in that category, including some very well-known ones like Equity Bank (Sh43), Safaricom (Sh28), Total Oil (Sh26), Barclays Bank (Sh10) etc.

After identifying the companies that are within her price range, the next step for Mary is to find out which among them are profitable. Now, every day, the Business Daily newspaper publishes a table showing important data about the companies listed on the NSE. It is titled “Daily Share Report”.

In this table, there is a column labeled “EPS Latest 12Mnth”. This is the total net profit declared during the last 12 months divided by the number of shares in the company. EPS is short for Earnings Per Share. As an investor, the total profit made by a company is meaningless; what you need to know is how much it made for you. This is the EPS multiplied by the number of shares you own.

If the entry in the EPS column is a negative number, then the company declared a loss in its most recent annual report. In the sub-Sh50 list, there are eight loss makers including some infamous ones like Kenya Airways, Uchumi, Mumias Sugar etc.

Now, seasoned and strategic investors do invest in loss-making companies but I wouldn’t advise a newcomer to do so! It is also important to note that this earning is not the dividend paid out!  Some companies make a profit but pay no dividend while others make a loss but still pay a dividend.

After removing the loss makers, Mary will be left with a list of about 40 companies to choose from. The next question to ask is whether you are getting good value for your money. That is, is the price too high? There are two ways to assess this – in terms of earnings and in terms of intrinsic value. I will discuss these methods next week.