The Zimbabwe Stock Exchange closed out the first half of the year with triple-digit percentage gains, powered by an unprecedented 1 495,87 percent gain in small cap counters.
The ZSE’s market value closed the first six months of the year up 134,42 percent at $745,2 billion.
Using the official exchange rate, this is an unprecedented valuation of US$8,7 billion for the local bourse.
For those who think the official exchange rate does not give a true reflection of the local Zimbabwe dollar using a parallel market rate of 140, the market is valued at US$5,3 billion.
Whatever value one can use, the ZSE has had a good rally so far in the year. In turnover terms, investors poured in $21 billion which is more than the $17 billion invested the whole of last year.
On average, investors are putting in $3,5 billion into the market per month this year, more than double the $1,4 billion that was finding its way to the market every month last year.
The market capitalisation has done more than it did same time last year. By end of June 25 last year, the ZSE market capitalisation had gained by just 11,23 percent, compared to 134 percent currently.
However, the indices have not rallied as much as they had same time last year, with the exception of the small cap index.
This time last year, the ZSE All Share Index, was up 679,84 percent, but so far it has done just 134,98 percent. The other indices are lagging behind last year’s performance with the exception of the Small Cap Index which has done better than last year.
Same time last year, the Small Cap Index had gained an impressive 752 percent, but this year it has gained a staggering 1 495,87 percent.
While it took the whole of last year, for the market to get a stock with a 12 000 percent gain in the form of CBZ, this year it has taken just two months for the market to get not only one, but two counters with gains above 12 000 percent.
Getbucks leads the risers, with a gain of 12 476 percent while Unifreight follows with a 12 140,2 percent. Four other counters, NTS (4 435 percent), Willdale (1 456,7 percent), GB Holdings (1 294,3 percent) and starafricacorporation (1 037,7 percent) have four digit gains so far in the year.
The mood is ebullient. Data on everything from consumer spending to increased capacity utilisation have remained resilient even under coronavirus pandemic woes.
Of course there are some companies that seem overbought, but there are still pockets of value in other stocks.
The basic rule of the stock markets is to buy low and sell high.
With the market at these lofty values, it means risk is elevated.
It thus requires investors to do proper analysis to determine which stocks are trading lower than their intrinsic valuations so as to buy and which ones are trading above their intrinsic valuations so as to offload.
There are quick ratios one can use.
Price to Earnings
Ratio (PE ratio)
The PE ratio simply compares the stock price to the company’s earnings per share.
A stock’s PE ratio indicates the number of years of current earnings the company needs to earn to recoup the amount paid for the stock.
A stock with a price of $400 and annual earnings of $50 is trading on a historical PE of 8 (400/50).
PE ratios can be used to compare a stock’s market value to similar companies, or to the company’s own historical valuation. However, a PE ratio should not be used in isolation. There are reasons for a stock to trade on higher or lower PE depending on future prospects.
Book value per share
By dividing the stock price by the book value per share, a stock’s premium to its assets can be calculated. This is a relative valuation ratio that incorporates both the market value and book value of a share.
A price to book ratio of less than 1 (one) implies a stock is trading below its intrinsic value and may offer a margin of safety to investors. Allocating capital to stocks with very low price to book ratios is a commonly used method of reducing portfolio risk, as downside is limited.
There are many other valuation metrics that investors should familiarise with. Google and find out! – Business Weekly