In October 2023, Nigeria witnessed a surge in headline inflation, reaching 27.33%, marking a 0.61% increase from the previous month. This substantial year-on-year rise of 6.24% compared to October 2022 raised concerns about its impact on investments, particularly its erosion of the purchasing power of money over time.
Understanding the implications of inflation on investments goes beyond focusing on nominal returns. While nominal returns represent the actual percentage gain or loss on an investment, real returns, which account for inflation, provide a more accurate reflection of the increase in purchasing power.
In an inflationary environment, traditional asset classes like bonds and cash equivalents face challenges in delivering positive real returns. In contrast, stocks generally have the potential to outperform inflation and provide positive real returns, although individual stock performance can vary widely.
Examining the total return of stocks, which includes capital gains and dividend yields relative to the inflation rate, is crucial. In 2022, this dynamic played out with divergent outcomes among stocks. Some recorded positive real returns, indicating growth that outpaced the inflation rate, while others grappled with negative real returns.
Guinness Nigeria Plc exemplified positive real returns, achieving an impressive total return of 87.99% in 2022. Considering the inflation rate closing at 21.34%, Guinness Plc secured a real return of 54.93%, reflecting strong performance during the period. In contrast, within the penny stock category, AXA Mansard recorded a total return of +4.21%, resulting in a negative real return of -14.12% when factoring in the inflation rate of 21.34%.
The resilience and growth of penny stocks in 2023 have been noteworthy, with over 40 stocks showing year-to-date gains above the current inflation rate. Ten standout performers, including CHAM, JAPAULGOLD, FTNCocoa, Ikeja Hotel, OMATEK, Golden Breweries, ABC Transport, THOMASWY, SUNUAssurance, and TRIPPLEG, not only outpaced inflation but also soared with triple-digit year-to-date gains.
Penny stocks, characterized by their modest per-share value often below N5, present an accessible entry into the market, making them attractive to investors seeking significant returns without a substantial upfront commitment. However, their high volatility makes them a blend of high-risk and high-profit instruments, prompting caution against adopting long-term buy-and-hold strategies.
The top ten penny stock performers in 2023 have showcased remarkable gains, with Omatek Ventures leading with a 335% year-to-date share price gain. Trading liquidity and market interest in Omatek are evident, ranking it as the 17th most traded stock on the NGX. Despite its share price growth, concerns arise due to the absence of dividends for the past five years and questions about whether the growth is supported by earnings.
Ikeja Hotels Plc, with a +349.52% year-to-date gain, experienced a significant rebound in 2023 after facing a decline in 2022. Unlike Omatek, Ikeja Hotels has a positive dividend history, distributing dividends for three out of the last five years. Financial resilience in the first nine months of 2023 adds to its positive outlook, but inconsistencies in earnings raise questions about the sustainability of the share price rally.
FTN Cocoa Processors, ranked second with a +489.66% year-to-date gain, has shown significant market activity with high trading volumes. However, caution is advised as the share price rally appears unsupported by the company’s financial performance, marked by consistent pre-tax losses over the past five years and a lack of stable dividends.
Japaul Gold and Ventures Plc, ranking third with a +507.14% year-to-date gain, operates in diverse sectors and has experienced significant trading activity. While its 9M 2023 results indicate a return to profitability, the company’s financial performance has been inconsistent, requiring careful consideration of the risks.
CHAMS Plc, leading with an impressive +827.27% year-to-date gain, is Nigeria’s leading provider of integrated identity management and payment transactional systems. The stock’s substantial trading liquidity suggests high market activity and investor interest. Positive momentum in CHAMS Plc’s share price may be attributed to investors perceiving its financial performance in 9M 2023 as a welcomed improvement, despite pre-tax losses over the last five years.
As investors navigate the dynamic landscape of penny stocks in 2023, the cyclic returns associated with these stocks emphasize the need for careful consideration of opportune moments to capitalize on profits. However, it is crucial to acknowledge the absence of guarantees in equity investments, with the best-case scenario being considered inflation-protected.
Against the backdrop of Nigeria’s current inflation rate of 27.33%, these penny stocks have not only weathered the economic storm but have also surpassed the rising inflation, showcasing their resilience in challenging economic conditions.
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