Investing
in stock markets and shareholder value
Our columnist discusses the basic criteria required to invest in
stocks and warns investors against blindly buying shares without
a proper plan.
I was having a chat with a stock broker friend recently and he was
upbeat about the market and how it was going up. I asked him what
was primarily driving it and he said that most stocks were merely
driven by speculators looking for a quick return. From this conversation
and from my own observations I feel most Sri Lankan small investors
actually invest in the market without a major knowledge about the
company or other important macro factors.
What
should you
look for?
I would basically categorise this into two which would be:
a) Micro factors
b) Macro factors
Micro
factors
These would be the specific factors related to the company.
They would primarily include
a) Earnings of the company
This would simply be the earnings per share (EPS). One year alone
is not adequate. Growth in earnings would be visible by comparing
them over several years. Good stocks would be those with high EPS
as well as high growth of EPS.
b)
Business model
The business model can make a difference with regard to scope. Some
businesses can take off significantly whereas others may remain
small but stable.
c)
Strategy of management
A good management team will have a vision for the firm and will
drive the company with focused strategies. This will ensure that
shareholder value will be maximized in the process. Richard Peiris
experienced such a turnaround in recent times with new management.
d)
Quality of management
This would primarily be the track record of the management team
with regard to business performance as well as corporate ethics.
Companies which have a good management team to manage them would
be a safe investment when compared to the others.
e)
Corporate governance factors
Your money invested would be safe only if there are good systems
to manage the company. The primary factors to look into would be,
non-executive directors, segregation of powers between chairman
and chief executive, performance contracts etc.
Macro
factors
These are overall factors which can affect the whole market
or sector and are generally beyond the individual firm's control.
a)
Economic conditions
The main concern should be the economy of the firms' market. Aitken
Spence will get affected by the Sri Lankan economy whereas those
such as Brandix do not depend on our economy.
b)
Political conditions
Domestic and international political stability are necessary to
do business and they can affect the performance of firms.
Message to the investor
The value of a company depends on earnings (EPS) and the
market confidence which can be estimated as the Price: Earnings
(PE) multiple. The confidence depends on the other micro and macro
factors.
Despite
these, in the short term, markets can move up and create bubbles
because of ambitious speculators. Every bubble will eventually burst
and when it does so the losers will be generally many small investors
who invested without a plan.
(The writer could be reached at - ravim@icbsgroup.com)
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