Are Good Companies Good Stocks? Evidence from Nairobi Stock Exchange

The search for abnormal stock returns seems elusive for many investors in efficient markets unless there are anomalies in such markets. This has led to the development of numerous stock selection methods including the application of technical and fundamental analysis in an attempt to beat the market. There is uncertainty as to whether good companies that are defined by strong earnings and sales growth are also good stocks whose prices appreciate and outperform other stocks in the market. This research employs a study sample consisting of 32 companies listed in the NSE to establish the relationship between good companies and good stocks. The Pearson’s correlation coefficient and descriptive statistics techniques were employed. The results indicate that there is a strong positive correlation between the good companies and good stocks in the NSE.

Testing Of Consistent Trends in Stock Performance In The Nairobi Securities Exchange

Consistent stock performance contradicts random adjustment of stock prices in efficient markets and is thus anomalous despite the potential of generating significant profits for investors. This research set out to test the existence of consistent stock performance in the NSE during the years 2001 to 2010 and to examine whether consistent stock performance is  associated with efficiency of NSE. Balanced monthly closing averagestock price data was employed for 32 sample stocks drawn using purposive sampling technique from a population of 56 stocks listed in the NSE during the study period. In order to identify consistent stock performance, frequency tests were employed. In order to test association between consistent stock performance and efficiency of NSE 3 tests were employed including: t-test to test the significance of abnormal returns of consistentstock performance. Runs serial correlation test was employed to test serial correlation of stock returns. Spearman rank correlation was also employed to test volatility of stock prices with time. The results indicated weak presence of consistent stock performance in the NSE and that abnormal returns of consistently performing stocks were insignificant.There was also zero serial correlation of stock returns and stock prices of consistently performing stocks exhibited low volatility with time. The overall results indicate that NSE may be weak form efficient. This research contributes to new knowledge by combining the alternative definitions of consistent stock performance to minimize on the inherent weaknesses of each definition(cross sectional and longitudinal) which havein the past been studied independently.Key Words: Consistent stock performance, serial correlation, volatility, abnormal returns, stock market efficiency