Making Money from Shares – Part 4: Identifying Candidates

There were 198 companies listed on the main board of the Nigerian stock exchange at the end of 2013. There are a few more companies listed on the second board (ASME) for smaller companies but they are thinly traded and suffer from corporate governance failure. Therefore they are high risk and best avoided.

Of the 198, only about 120 are traded daily. Another 24 are selling at N1 or less. These are mostly insurance companies that have collapsed to the minimum price of 50 kobo and are thus worth much less. We can also eliminate this from the investing pool as companies that are so low priced are either in bad financial health or suffer from more serious governance issues and are therefore not worthy of our attention or money.

The remaining 96 are split into 11 different sectors by the NSE. The sectors are:

1. Agriculture
2. Conglomerates
3. Construction/Real Estate
4. Consumer Goods
5. Financial Services
6. Healthcare
7. ICT
8. Industrial Goods
9. Natural Resources
10. Oil and Gas
11. Services

One sector I will single out for criticism is the ICT sector. Most of the companies in this sector have failed to pay any dividend in over 5 years and most are usually very late in filing their quarterly returns and some have even been fingered and investigated by SEC for fraud. Therefore avoid the companies in this sector. Currently there are eleven in this sector namely: Courtville, Omatek, MTECH, Computer Warehouse, NCR, Tripple Gee (one of the better ones but avoid), Chams, Etranzact, Starcomms, IHS and MTI.

I highly recommend you spread your investment into at least 8 companies chosen from 6 out of the 10 remaining sectors. Also avoid owning more than 15 companies at a time, as it is difficult to keep track of the companies when they exceed 15. If you must buy the 16th, drop the least attractive among the 15 and replace with the new company. This way you can stick with a maximum of 15 of your best ideas that are more than adequate for risk management.

Our list is now down to 86 companies across 10 sectors, which is manageable. It is from this pool we will concentrate our analysis and selection of candidates for investing.

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