The year has barely moved and stocks are already posting some eye-rolling negative returns. So how do you pick stocks in the current turmoil? In a turmoil like this, you don’t just pick stocks; you cherry-pick. And I suggest that you do so guided by some three cardinal pointers.
First is strong leadership. Look at it this way: last year, a record 17 listed companies at the Nairobi Securities Exchange issued profit warnings.
Just how much do you trust the current management to lead the company out of whatever rough patches it is going through? If your trust is very low then don’t expose yourself to that stock, and the converse applies.
Second is cash position. There are five blue-chip stocks that have been severely punished by the market because of sitting in precarious cash positions.
Biggest challenges
This year, one of the biggest challenges for companies will be cost of financing their activities — either working capital or capital expenditure (capex) financing, whether foreign or local currency, and for obvious reasons.
If you come across an unfairly punished stock operating in a cash-intensive sector but sitting on a healthy cash position, be contrarian and pick the stock(s).
Healthy cash position can mean the ability to expand capacity without resorting to expensive capex financing, easily acquire a distressed rival or even sustain a healthy dividend payout for some time.
At a time like this, consumables, well-diversified oil marketers (and by diversified I mean not all their products are within the price controls regime) and telcos tend to fit the bill.
Again, don’t be tempted to look at these stock-picking ideas in isolation, rather make use of at least two in picking a stock.
