Penny stocks rule bearish market

By OKEY ONYENWEAKU

As the year crawls to a gradual close, many observers now appear certain that the Nigerian economy will not wake up overnight to its most anticipated GDP growth jump. Nigerians are in fact, not expecting any magic. And not even big corporations are certain of what to expect. However, while this latter segment of players do not seem very impressed with the weak economy which will to a large extent determine what figures will show in their books at the close of the business year in 2019, they have also not stopped reviewing and debating the economic situation to know how to plan for 2020 as they watch the budget debate unfold.

Despite its recently reviewing Nigeria’s economic growth upward to 2.1 per cent in its second forecast (it earlier put the expected growth rate at 2 per cent in January, down from the initial figure of 2.3 per cent), the expectations at the Nigerian Stock Exchange has not changed as the equities market remains negative at -16.57 percent year to date.

However, with the Chief Economist & Director of Research, IMF, Gita Gopinath’s projections that Nigeria would continue to experience a weakening economic growth in the just concluded Annual International Monetary Fund IMF, / World Bank meetings, the reality is that investing in equities market may remain unattractive for some more time to come.

The economy which has hardly grown above an average of 1.5 percent since 2015 and has hardly nudged hopes of investors positively, has forced many stocks to become penny stocks. Of the 166 equities that traded on the price chart of the Nigerian bourse last Wednesday October 30, 2019, more than 70 stocks on the NSE price chart closed the business day as penny stocks.

Experts say that penny stocks are small company’s stocks that typically trade for less that $5 per share. Although some penny stocks trade on large exchanges such as the NYSE, most penny stocks however trade over the counter through the OTC Bulletin.

In the Nigeria capital market context, Business Hallmark’s research refers to penny stocks as stocks that are valued at N2.00 and less. Some of these stocks include almost all the insurance companies which are: African Alliance, 0.63 kobo, AIICO Insurance Plc, N1.65, Consolidated Hallmark, 37 kobo, Conerstone Insurance, 41 kobo, Goldlink Insurance Plc, 20 kobo, Guinea Insurance Plc, 20 kobo, Niger Insurance Plc , 20kobo, Law Union And Rock Plc, 45 kobo, Sovereign Trust Insurance, 20 kobo, Staco Insurance, 48 kobo, Standard Alliance, 20 kobo and Nem Insurance, N2.00.

Other companies are Livestock Feeds Plc, 46 kobo, AG Leventis NIG Plc, 28 kobo, John Holt Plc, 55 kobo, Transcorp, N1.02 kobo, Champion Breweries Plc, N1.02, UACN Property, N1.07, Golden Guinea Breweries, 89 kobo, HoneyWell Flour Mills, 95 kobo, Multi Trex Integrated foods, 36 kobo, Jaiz Bank Plc, 45 kobo, Unity Bank Plc, 63kobo, and Wema Bank Plc, 59 kobo.

The par value of stocks on the NSE used to be 50 Kobo. This meant that stocks were not allowed by the earlier rules of the exchange to trade lower than 50kobo per share on the trading platform. But this was changed in 2015 and became effective on January 2018 when stocks prices were now allowed to be determined by market forces.

“The amended Pricing Methodology and Par Value Rules of the Exchange, which had been approved by the Securities and Exchange Commission (SEC) shall become effective today, Monday, January, 2018. The new Rules can be found in Rules 15.29 and 15.30 respectively of the Rulebook of the Exchange, 2015 (Dealing Members’ Rules),’’ the NSE had said.

The NSE noted that ‘’The Rules will be implemented on The Exchange’s trading engine on the effective date, specified the revised price limit, price movements and tick sizes i.e. price floor, minimum pricing increments and minimum quantity to be traded that will change the published price. The Rules also classify equity securities into different price groups in order to achieve this.

On the new Rules, Head, Market Surveillance and Investigations Department, NSE, Mr. Abimbola Babalola said, “The amended stratification of price movements, price limits and tick sizes aims at improving liquidity, narrowing spreads, and ensuring that all price improving (up/down) transactions are material, making the market more efficient for all participants”.

According to Babalola, in order to achieve the aforementioned aims of improved liquidity, narrowed spreads, material price improvements, and market efficiency, the amendments to the Pricing Methodology Rule included the introduction of a new price group – “Group C”.

Market participants were afterwards informed that the new Par Value Rule specifies that the price of every share listed on NSE shall be determined by the market forces and equities may now trade below the erstwhile price floor of fifty Kobo (N0.50) per unit. A reflection of the Pricing methodology is the 20 kobo share prices that litter the price chart.

Over the years, penny stocks have been quite attractive. Discerning investors have used penny stocks to beef up their portfolio. ‘’ Investing in penny stocks have always favoured me. I come to the market close to every end of year to pick penny stocks mostly when they are at their lowest or have bottomed out and sell them off higher in the firstborn second quarter and make my margin ‘’, an investor who does not want his name in print told Business Hallmark.

But that cycle of investment seems to have changed.

The weak economy has also taken its toll on the equities market where last week it was only Access Bank’s stock that defied the bearish trend especially in the banking sector.

A Lagos based analyst, Mike Ezeh, the CEO of Crane Securities limited, told Business Hallmark that the bearish market was a reflection of the weak economy. ‘’It is only Dangote and Access Bank that have made impressive gains in the market because of recent mergers they contracted. We used to have rallies but there not even been any rally since this year. The market is not isolated from the economy’’, said Mike Ezeh

Experts say the major benefit of Penny Stocks is that their Per Share Price is very low because an investor does not need large capital to start investment. Unlike the illiquid stocks such as Nestle Nigeria whose price hovers between N1.200 and above,     it’s much easy for you to buy penny stocks because these are common shares and easily available for the general public to buy.

‘’Perhaps the most notable advantage, however, is that the Per Share Price of these stocks is low. Some prefer these stocks because it’s easy for the public to purchase them; others prefer them because they move up at quicker intervals. So while short term investing can be risky, and is generally better-suited to seasoned investors who understand the market, moving up in quicker intervals means individuals can make money in a short amount of time with these stocks’’, said experts

But the weak condition of the equities market betrays a different scenario where investing in Penny stocks have become highly risky given the pressure from the bears, and forcing more stocks down to the category of penny stocks.

The All-Share Index which opened on January 3, 2019 at 30,771.32 basis points closed last Friday, November 8, 2019 at 26,193.53 points. Even more alarming is the fact that none of the sectors of the market was spared in the declining value dive. From the banking index through the insurance index, Oil and Gas and on to the Consumer Goods Index, all are trending South. Not even the listing of heavy stocks like MTN and Airtel Africa have made a sustained impact on trading performance as the best that they have done has been to boost market capitalization.

Findings by BH reveal that the market is still very weak and it is difficult to predict with any amount of certainty its future. However, before now, it had gained 65% in 2003;18.5%in 2004;1.01% in 2005;37.80% in 2006 and 74.73% in 2007. It had in the past also lost -45.77% in 2008 and -33.80% in 2009 before it took a rebound to gain 18.50% in 2010. The market slipped back in the negative by -17% in 2011, gained – 35.4% in 2012, gained 47.19% in 2013, lost by -16.14%. It closed in the negative by -17.36% in 2015, -6.% in 2016, it gained 42.30 per cent in 2017, and closed negative by -17.81 per cent in 2018.

Though some believe that the Nigerian market is not predictable, the macro- economic environment does not betray any pleasant future in the short and medium term if the government refuses to directly fashion out a direction for the market. And what form could this take? Some have suggested that the government should invest in the market to help restore investor confidence. But would it?