Picking stocks for your portfolio

I stumbled upon this article adapted from Michael Sivy’s “Sivy on Stocks column, which I have adapted for the Nigerian investor.

Although there are more than 100 publicly traded companies on the floor of the Nigerian Stock Exchange, the core of your stock portfolio should consist of financially strong companies with above-average earnings growth.

Surprisingly, there are only about 40 stocks that fit that description. A well-balanced stock portfolio should consist of 15 to 20 stocks, across seven or more different industries – but you don’t have to buy them all at once.

Since you want to be able to hold your stocks for a long time, they should offer a total return higher than the 10 percent historical market average. You can estimate the likely return by adding the dividend yield to the projected earnings growth rate – a stock with 11 percent earnings growth and a 2 percent yield could provide a 13 percent annual total return.

As a general rule, stocks with moderately above-average growth rates and reasonable valuations are the best buys. Statistically, high-growth stocks are usually overpriced and have a harder time meeting inflated investor expectations.

The first thing to look at is the stock’s price/earnings ratio compared with its projected total return. Ideally, the P/E should be less than double the projected return (a P/E of no more than 30 for a stock with 15 percent total return potential).

A well-balanced portfolio might include a couple of multinationals such as Unilever, May & Baker, UACN e.t.c. with 9 percent growth rates and 3 percent yields, selling at 17 P/Es, as well as consumer growth stocks with 13 percent growth rates and 1 percent yields, at 23 P/Es.

Add a couple of tech stocks such as Tripplegee (don’t overdo it on those).

If you can average a 14 percent return over the next 10 to 20 years, you’ll reach your financial goals – and probably outperform most pros as well.

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