LONG-TERM INVESTMENT STRATEGY IN EQUITIES-A FUNDAMENTAL ANALYSIS

By Joseph Karumba:

Any investment one makes in equities should be based on concrete reasons. There are two kinds of equities investors namely: short term and long term traders. The former buy and then sell their shares within a short time span, usually ranging from 3 months to even a daily basis (known as day trading). Their gains are based mainly on share price variations due to cyclical events in a company’s fiscal year. What causes share price increase is fundamentally an increase in demand for that particular stock. This surge in demand may be attributed to company announcements such as an increase in profits, a run up to book closure for dividends payout, share splits and rights issues. That is a topic for another piece. The latter kind of investors, hold stock for much longer periods from 5 years onwards. I shall focus on the long term investment strategy in this piece.

The fundamental driver of stock value appreciation is a rise or prospective rise in company earnings. So what contributes to a sound stock pick as a long term investor?

·        A capable high performance management team and a board whose members have both good repute and a wealth of relevant experience. As for the management, one can check the performance of the company if they have been around for a while and if they are new, especially the CEO, one can look into their credentials and performance record prior to joining the firm. A list of these individuals is always available on the firm’s website. Case in point, under Linus Gitahi, the NMG has done tremendously well. The change of guard at the helm of this media company demanded a look into the record of his past performance. Indeed his record at the NMG is at par, if not better with his performance at the Glaxosmithkline, where he worked previously.

·        Current financial standings. The company should be profitable for the current and the past few years for in truth, it all comes down to the earnings. Its assets should be larger compared to previous years-this indicates growth. This information can be found in Q1, Q3, half-year and full year financial results which can be obtained from the company’s website.

·        Is the company’s name a brand within the market in which it plays? Many a times no research is necessary to know this. Their products are known by many and are common in many parts of their market region. Am sure you have heard people say, or said it yourself,: 'Mpesa ya Yu' 'Ile Omo mpya ya Ariel'...this is characteristic of brand products. You will not miss them on the shelves of any supermaket or even small shops countrywide.

·       Understand the business model and check whether the company has a competitive advantage so as to know whether it is sustainable in the long run. For instance, when along came Equity bank, whose model was to serve simply, the needs of the majority of the then unbanked population, many banks in existence then had to restructure their business model- in the long run they would not be sustainable in this Wanjiku economy.

·         Future prospects of the company are also vital. In this criterion you assess the firm’s expansion plans if any and the growth of the industry in which it operates in general. The former can be found in the annual reports of the company. The latter only demands elementary economic analysis. Let's look at the property and infrastructure development in Kenya. This means there will an increase in demand for capital to finance the construction and purchase of these sprouting projects. This means that mortgage service providers, eg S&L under KCB, Housing finance among other financial institutions stand to gain from this opportunity. The cement industry will also supply more cement in line with this demand indicating potential for growth.

The task at the hand of an investor is to find listed companies that have a good combination of the attributes mentioned and explored above. Though a bit taxing, the rewards are worth the effort. It truly is, never too early to start, for the least you can gain is a ton of experience to aid you later on to reap tons of profit.