Companies to Avoid when Investing

Published on 15th August 2006

If you have been keen on the changing trends in the stock market lately, you must have noticed the declining levels of market ineptitude.  Unlike before, the volumes of trades in companies with weakness aspects have declined tremendously.  A chartist will reveal to you that it is a normal trend for weak companies to trade- “just as long as the law of demand and supply holds.”

 

As an investor, the thought of buying into a weak company should ring a bell. It requires quick thinking to realize that buying into a loss making business is like renting into a company that can either compound your investment or give it back to you in the negative.  Worse still, you could end up losing it all- not even qualifying for the par value as was witnessed with the recent suspension of a retail chain.

 

If you are an investor who values the worth of a business practice, you should only engage in activities that you wouldn’t be afraid to engage in on your own, given the power.  In such a case, companies on the negative trail should be no go zones. If you are cashing in on market inefficiencies, then the inefficiencies could as well come down with you- at which your broker will be at no loss.

 

It will be wise to avoid companies that bet their peers. Many times, a company’s management is bound to make critical decisions that are bound to affect its long term performance. If the decisions are wrong they may pull down a company to a point of no recovery.  Uchumi’s case is a good case in point.  The management was upbeat that their investment in fixed assets was a big boost to the company’s long term prospects. But digging into the current assets and debt to fund such a venture may not have been a good investment decision. While the company was busy investing in fixed assets, the competitors saw an opportunity to come up with strategic positions that paved way for mega stores. This, within the mid term only, gave muscle to the competitors leaving out the retail chain at the pleading end.

 

Year after year, Uchumi’s cash flows moved to a declining trend and never got to the recovery path.  Business seems to be picking up after the government’s bail out. As emotions still rein in the customer's flow, the company may need to act fast in adopting a model that will keep them competitive.

 

It is important to note that some companies’ backbone lies in research.  Besides that, their business ceases to be. Consider Sameer Africa, formerly Firestone East Africa, a tyre manufacturer listed in the main investment market segment.  The company had a huge market share in Kenya- almost becoming the brand of choice for almost every car.  That was only until last year.  Research may not have helped the company much as the entry of other cheaper imported tyres has reduced their market by more than half.  This is justified by their recent 68 percent decline in profits.  Tyre manufacture may cease being the core business as competition pushes the company into importation of cheaper tyres. 

 

Avoid companies that are heavily indebted for they may be working hard towards servicing their debt instead of rewarding the shareholders. If the same business experiences a blow due to other systemic risks, then the company could go bankrupt.  According to Richard Gibbons, a company that requires debt to achieve superior returns for shareholders is less likely to be a great business.

 

That’s the same thing that happened to the chain store a few months ago. Towards its closure, Uchumi owed its creditors over Kshs. 1 billion in debt.  Inspite of the debt the counter still attracted a lot of attention.  This had many people burn their fingers after the announcement that the company had finally closed its doors to business.

 

Companies with questionable management must also be shunned at all time.  Despite East Africa Portland Cement’s outstanding performance in the recent past, their performance doesn’t seem to promise a good future. The company recently saw 5 directors resign among which were the company’s CEO.  Shareholders are yet to know what’s next as the government (with a major stake) decides over who takes over the CEO’s post.  Investors should also be wary of optimistic press releases about companies continuously releasing press briefings about new products amid declining revenues.  Even World Com and Enron who were upbeat about the future, gave generous compensations but at the end of the day, it all translated to nothing for the shareholders.

 

Some companies continuously require capital investment.  Such companies offer spectacular returns to shareholders over the long run because their return on capital is very high.  However, this also leads to excessive capital which can be used by a company to repurchase shares, pay dividends to shareholders or reinvest in further growth.  The main beneficiaries in this ideal are the employees, management, suppliers and the government.  The shareholders are always the least to benefit.

 

Our listed firms could have companies that display these weaknesses.  Others may not show outrightly by just gleaming through the available information.  It is your duty as the investor to look for the hidden flaws in a company to avoid the dreadful stocks.

 

In addition, there are still other companies that I highly underrate for other reasons prevalent in the state of the books.  Below is a list with a few facts about the companies.

 

Ordinary Shares

Par

Average

Total

Mat
Cap.

EPS

DPS

P/E

Dividend

 

Value

Prices

Shares

Kshs
Mn.

 

 

 

Yield

 

 

As at Aug 11

Issued

 

Kakuzi

5/-

34.50

19,599,999

676.20

(3.76)

0.00

-9.18

0.00%

Sasini

5/-

29.75

38,009,250

1,130.78

-10.17

0.00

-2.93

0.00%

A. Baumann

5/-

12.50

3,840,066

48.00

(2.75)

0.00

-4.55

0.00%

Eaagads

1/25

17.60

8,039,250

141.49

-0.24

0.00

-73.33

0.00%

Williamson Tea

5/-

82.50

8,756,320

722.40

-6.29

0.00

-13.12

0.61%

K. Orchards

5/-

5.00

12,868,124

64.34

-1.24

0.00

-4.03

0.00%

Limuru Tea

20/-

350.00

600,000

210.00

(5.27)

0.00

-66.41

1.43%

 

 

 

 

 

 

 

 

 

Some companies do not fall in this list but their current performance still requires a lot of strengthening to get them at competitive levels. Failure to do this could push them into declining performance and later render their businesses impossible. They include:

Ordinary Shares

 Par

Average

Total

Mkt
Cap. 

EPS

DPS

P/E

Divided

 

Value

Prices

Shares

Kshs
Mn

 

 

 

Yield

 

 

As at August 11th

Issued

 

 

 

Marshalls

5/-

32.75

14,393,106

471.37

3.11

1.00

10.53

3.05%

National Bank

5/-

54.00

200,000,000

10,800.00

1.29

0.00

41.86

0.00%

Olympia Capital Holdings

5/-

14.70

10,000,000

147.00

1.14

0.00

12.89

0.00%

Sameer Africa Ltd

5/-

15.25

278,342,393

4,244.72

0.74

0.50

20.61

3.28%

Unga

5/-

15.85

63,090,728

999.99

1.15

0.00

13.78

0.00%

 


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