10 October 2008
opinion
Kampala If you are an investor on the Uganda Securities Exchange you watched the news on Tuesday night with a little more anxiety.
With all stocks taking a plunge, you probably wondered why a stock, like Stanbic Bank (SBU) can go down by 16 percent (closing at Sh.155), after being stable for long.
According to Mr. David Gathaara, head sales and trading at MBEA, SBU had seen it coming because most people lost money during Safariccom. He attributed the slide to emotional reactions.
"For me it is panic selling and it has absolutely nothing to do with company fundamentals," he said. Although it is hard to verify why there was wide-scale selling of the SBU stock, which resulted into sharp fall in the price.
It is important to understand the implications of panic selling. This is because in such situations investors just want to get rid of their stocks irrespective of the price at which they sell.
Panic selling is not a result of evaluating fundamentals. It is prompted by pure emotions like fear; and, is one the major causes of most market crashes.
That is why major stock exchanges apply trading curbs and halts to check panic selling. This allows for time to understand why the selling is moving downwards and restore a sense of normality in the market.
The best thing to do in such circumstances is wait and watch. But if you are interested in buying, given the current trend of events at USE, then make sure you buy at the lowest price possible.
If you intend to sell, it is better to hold on. After all, SBU is still one of the best performing stocks, in terms of financial ratios. Its P/E (Price per share/Earnings per share) ratio is about 14.97.
One other thing is that there has been a general slow down in the market and foreign investors are staying away given the current global financial crisis. These factors in tandem with the fact that most Ugandans investors, unlike their Kenyan counter-parts, aim for a quick buck took their toll on SBU.
The P/E ratio alone does not sufficiently explain the stock's performance and therefore it is better to compare a company's P/E ratio with another company in the same industry, the market in general or against the company's history. Before, I go to the actual figures it important to point out that most stocks between a P/E ratio of 15 to 25.
A P/E ratio beyond 25 is considered to be speculative, unless its earnings are really good. A higher P/E ratio implies that you are paying more for each unit of income.
Now the figures.
Compared to other banks listed on the stock exchange, Bank of Baroda (BOBU)'s P/E ratio is 41.84. This is too high and it implies that SBU (P/E is 14.97) is a better stock than BOBU. The P/E for dfcu is 22.91, which is not too bad either.
You can use the P/E ratio to compare the share values. As a rule of thumb, if the P/E ratio of stock A is twice that of stock B, then other factors remaining constant, particularly the earnings growth rate, stock A is less attractive to invest in. The main factor to remain constant is the earnings growth rate.
The writer is Managing Editor www.myfinance.co.ug
Copyright © 2008 The Monitor. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
Read comments. Write your own.
