Doyl Smith, Guest Writer

The post-election period in the Jamaican stock market has been phenomenal, ending with record index values.

Investors also got a sneak peak of how undervalued some of our blue-chip companies are - for example, the premium paid for Lascelles deMercado was two times the value it started at in 2007 - and the extent to which the uncertainties of the election period influenced the decline of the market.

Two major market events happened in 2007: national elections, and the largest takeover offer the Jamaican stock market has had in its history.

Lascelles, once the company was valued, including the growth potential, the true price of the stock came out at US$10.65 per share or north of J$700 per unit. Before the takeover bid from Angostura, Lascelles was trading at $246 per share with three years of consistent profit increases.

The offer by Angostura was, therefore, able to unlock the value inherent in the company, rewarding shareholders accordingly.

2008 OUTLOOK

The current administration has declared their interest in expanding the economy. This can only be accomplished within a stable interest-rate environment. Once interest rates are stable and declining, the stock market should do well.

A buoyant Jamaican stock market does not necessarily depend on growth in the economy, just some amount of economic stability, to deliver excellent returns.

To illustrate, 2003 and 2004 were double-digit growth years for the stock market despite economic growth coming in at roughly 2.0 per cent for both years and Treasury bill rates of 21 per cent and 14 per cent, respectively.

The upcoming years for the stock market will be good ones for value investors, especially considering how undervalued the market has been over the past two to three years.

With the US$309 million payout from the sale of Lascelles - of which a percentage seems to be finding its way to the market to buy stocks - and possibly an earlier than 2011 payout of the US$300 million-plus balance from the sale, the equity market should have the necessary 'financial fuel' for growth.

RECESSION IMPACT

The National Bureau of Eco-nomic Research is held to be the organisation that determines when the United States has experienced a recession.

It defines a recession as being "a significant decline in economic activity spread across the economy, lasting more than a few months." While the jury is out as to whether or not the US is now in a recession, it is interesting to note that the Jamaican stock market has not historically been impacted by a US downturn, even one that lasts up to 16 months, rather than the average eight.

The Jamaican market seems to move on its own dynamics and, interestingly, the past four US recessions have coincided with good years for local stocks (see table).

STOCK PICKS

Jamaica Broilers: The company has a management team that has proven to be innovative and able to consistently deliver positive returns to shareholders. This includes delivering one of the best dividend yields on the market.

Jamaica Broilers now has the additional income-generating capacity of its ethanol plant. The PE ratio is 11 times earnings with a price-to-book ratio of 1.2 times making the current trading price of $4.50 quite attractive.

JMMB: Coming out the largest securities issue on the stock exchange, a $2.5 billion preference-share offer, JMMB is on an aggressive expansion drive. The company is well poised to deliver higher profits to its shareholders.

The PE of 13.86 times is the second-highest in the industry, however, once profits from the company's growth plans are realised, this premium would become acceptable.

The stock is now trading at $11.70.

Pan Jam/First Jamaica: Pan Jam and First Jamaica Investments are two of the best value-for-money plays on the exchange. In addition to having high value and a 90-plus per cent occupied commercial real estate, the company's stake in LOJ allows it to have a consistent income stream.

With PE ratios of 10.04 and 9.14 and price-to-book values of 1.44 and 1.45, respectively, both companies should do quite well as investors look for asset-rich companies.

Pan Jam is trading at $55.25 and First Jamaica at $40.25.

SPECULATIVE STOCKS

Capital and Credit Merchant Bank

Pegasus

Both of these are potential acquisition candidates. Capital and Credit is trading at $11.05, which is just above its book value ratio of 1.33 times, while Pegasus is trading below book value at $13.50 per share, or 0.57 times its book value.

The risk of purchase, therefore, is low, while the potential for reward is quite good, if a deal occurs.

It will be an interesting year for the market in 2008. With elections out of the way, undervalued stocks, and funds coming in from the sale of Lascelles, the market is in a good position for long-term investors.

A US recession, if it happens, is unlikely to negatively impact the market. The question of Jamaica's interest rates and whether they will be higher or lower will be a critical element going forward.

However, if the current administration is looking to implement an expansionary economic model, interest rates will have to go lower, which would bode well for the stock market.

As always, when making any investment decision, establish the risk levels that you are comfortable with taking and speak to a financial adviser.

Doyl Smith (MBA) is a corporate relationship manager with Jamaica Money Market Brokers. Email: doyl_smith@jmmb.com

The market ahead

US Recessions	Duration	Returns on Ja stocks
Jan 1980-Jul 1980	6 months	18%
Jul 1981-Nov 1982	16 months	118%
Jul 1990-Mar 1991	8 months	202%
Mar 2001-Nov 2001	8 months	17%

Source: US National Bureau of Economic Research and Jamaica Stock Exchange