Saturday, September 09, 2006

Is the NSE Overvalued?
YES and here's why
The NSE is overvalued when you compare it to ther markets in terms of P/E ratio and dividend yields.
Take the current darling of the exchange KENGEN. the whole week people have been telling me what a great buy it is at sh.37/- 34/-.The P/E is 41. the Dividend yield is 0.67% REMEMBER; that you can only make your money on the Stock Exchange in two ways :

1.The Earnings at Kengen grow at a fast rate 40% plus a year.Consequently the share price appreciates. You get Capital Gains(price rises lets say to Ksh.60)

2.The Dividend grows at a fast rate lets say 50% annually.

How likely is it that KENGEN's turnover will grow at a rate of 40% every year for the next 3 years.Remember its turnover is sh.11 Billion and Pre-Tax Profit is Sh.2.6Billion. If the Turnover grew at that rate it would be at Sh 30 Billion and profit at sh7.1 Billion in 3 years.That will be larger than EABL in turnover.
I would say highly unlikely.

Then you are left with the second option, a high price that enables you to book Capital Gains.This is what is hapening now.But at some point the price has got to stop rising.Even a good company can become over-priced.Yes, you can pay too much for something.

Now don't get me wrong i'm not against KENGEN, i used to hold its shares and will buy them again at a cheaper price. The issue is that most of the co.s listed today can only make you money if the stock prices kept rising at current rates for the next 3-5 years(and dividends at least 20% annually).Look at ARM,Bamburi,CMC,HFCK,National Bank,KCB, EA Cables........... same story.

The NSE now is a traders' market not a value investors market so application trading tactics for success is necessary.

So, If the NSE is overvalued why is it still trading at high prices?
There are two factors:
INTEREST RATES: As long as rates remain below inflation and below 10% it still makes sense to buy a stock with 3% Dividend yield and 10% capital gain.If rates go back to double digits T-Bills will be popular again.

IGNORANCE: If people have no alternative investment avenues especially Fund managers. They 'll just keep pouring money into the market regardless of the valuations.After all in the short term they make a kill on the market, in the Long Run....heck it'll be someone else's problem.

There are alot of new players in the market who are unaware that the value of your shares can go up or down.They look at the relative price from Ksh.100 to judge the value of a share.The lower the price and the more often its mentioned on news-The higher the value.
These are the people driving the prices up

NEXT WEEK i will give you an alternate view on the valuation of the NSE.


coldtusker said...

Excellent! This is what I have been trying to tell folks whether KenGen, KCB or NBK...

Of course, NBK has a whole set of other problems!

I await the other biew but unless Kenya sees a constant 8% growth over the next 5 years & the EAC provides a "new" market... many of the shares are overpriced!

That said... EAC blew me away... I neer expected the current price even after factoring in great growth!

I think many will get burnt & prices will drop for the "value" investors to get back in.

pesa tu said...

@COLDTUSKER: Right on, we are on the same page.

mwasjd said...

I figure that if you learn the 'rules', you'll be better placed to benefit from the market. If value trading isn't working right now, why stand for it? My take is ride the waves, and just be prepared to exit before the crash. Being informed of the status of the market is key, including the fact that it is overvalued.

coldtusker said...

mwsajd: I agree with you! I think this is the time for momentum/speculative investors!

The catch in the system is WHEN do you exit?

The brokers are inefficient i.e. why is it they hardly buy or sell YOUR shares even when there are multiple trades for thousands/millions of share???

I think many brokers trade on their OWN account denying the rest of us!

Long-term/fundamental means one can wait all the madness out... I will wait!

BTW, EAC has dropped from 100/- to 85/- (14 Sep 2006) & I expect a further drop to 78/- tomorrow.

pesa tu said...

@Mwasjd:Yes, that's what i'm doing. Read my blog next week on the alternate view of NSE. Reminds me of one of the Rules of trading i.e.When Trading operate like a mercenary Guerilla-trade on the winning side.

@Coldtusker: Yes, when to exit is the question, but i think as soon as 'Mama Mboga' makes her first loss on NSE

coldtusker said...

How do you know when Mama Mboga makes her first loss?

They say, if you know you hit the peak, you are already too late!

NSE doesn't have market makers & brokers will sell their shares, their firms shares, their relas shares, their friends shares BEFORE they sell yours... so the price will have angukaed to a level lower than you can get now!

pesa tu said...

Ha..ha.. true that Cold Tusker.You can only guess