AP Finally Proves a Point on Value Investing
17 October, 2007
Nigerian oil marketing company, African Petroleum, has been in a powerful upward price run for several months now, pushing up its price from N38.50 by 6th December, 2006 to N112.24 by the close of business on 19th October, 2007. That's surely excellent news for AP investors, especially those that bought the stock at high cost during AP's 2004 hybrid (rights and subscription) offer and had to wait patiently through the agonising months that the price tottered.
In case you don't have a clear picture of that chequered period, let's refresh your mind a bit. Prior to the AP share offer, the company had been on technical suspension for months on the Nigerian stock exchange, over issues relating to alleged indebtedness to some banks and claims of inadequate disclosure to the core investor in the privatisation process. While prices of peer oil marketing companies climbed to the N100 or more region, AP's price remained frozen at below N42.87. As things got sorted out, AP came to the capital market to raise additional funds. Many investors, understandably, reasoned that the offer, which came at the price of N42 for the public offer and N40 for the rights issue, was much underpriced. That led to a scramble for renounced rights - especially as it wasn't known that the company would eventually absorb the full subscription. Many investors paid outrageous prices to buy up available rights. The calculation was that the stock's price would skyrocket to assume its rightful place relative to peers.
Okay, the price of AP did go up immediately after the offer was concluded and the price suspension lifted, getting to as high as N84. But all that was before most allottees got their share certificates. That price was soon to crash, especially as AP got embroiled in further debt issues with the NNPC. It can be said that the company went through trying a time, leading to the eventual pull-out of the initial core investor and the conversion of debts to equity in favour of NNPC. In all that period, the stock price remained depressed, proving an enormous challenge to those who invested in significant quantities of the stock.
Some investors, however, read political factors as underpinning the travails of the company. Such investors still believed in the fundamental strength of the company. They believed its business potentials were still good and that if the fog, political or otherwise, cleared, the company would regain its bearing and see a restoration of its glory.
That hour of glory is now here, for sure. The company has weathered the storm and repositioned, not only with a brandnew core investor and leadership, but with a strong market performance to confirm its rejuvenation. AP is again in sunny times and shareholders who kept faith through that turbulent period have good cause to smile. Not so for a friend, for instance, who got frustrated in the process and sold off at N38, just a short while before the price rebound that followed the presentation of impressive company results. It has since sustained that trend, with market confidence in its performance soaring.
"So, what's the point about value investing?", you might ask. First, value investing is a stock selection strategy that targets stocks that are underpriced, that is, stocks being traded at below their real intrinsic value. Value investors search out stocks that are currently undervalued by the market. Undervaluation is possible if the market has not considered underlying business factors or investors have over-reacted to developments, thus pricing down the stock, below its real value. Value investors reason that such stocks will only remain so for a while. The market will eventually realise their true value and that will mean some sweet price appreciation. In effect, the price will eventually correct to the appropriate level, meaning profit for those that invested at the depressed price. Value investors therefore focus on measuring intrinsic value, often using indices of fundamental corporate health and potentials. If the fundamentals are good, irrespective of the market position on price, they dig in and wait, knowing that it will eventually be well. American Benjamin Graham (author of The Intelligent Investor) is credited with the fatherhood of the value investing concept, but noteable followers like David Dodd, Warren Buffett, Charlie Munger, William J. Ruane, Irving Kahn, John Templeton and Charles Brandes have proved successful investors.
The AP experience is perhaps another pointer that when the fundamentals of the business are still solid, irrespective of current market sentiments (often in reaction to current events that have not eroded underlying value), it is safe, nay good invesment to dig in and stay. The market will eventually come round to it. That's why value investors tend to be buy-and-hold people.
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