Since the start of this year, the Jamaican economy and in particular, the financial sector has undergone significant changes. The ramifications of this have undoubtedly led to renewed interest in the local stock market, as investor confidence has been reignited against the backdrop of the International Monetary Fund (IMF) agreement – a deal which is expected to support medium term stability. The main propellant has been the significant reduction in interest rates, pinnacled by the Jamaica Debt Exchange (JDX) Programme which has made local equities an even more attractive investment option.

Turning to the numbers, the Jamaica Stock Exchange (JSE) Market Index has seen a dramatic uptick since the start of the year with its average daily trading volume almost tripling from a year ago. The average volume for the year-to-date period stands at 22.5 million, compared with 8.2 million in the corresponding period in 2009. Even more compelling, since the beginning of 2010, the majority of local stocks have rallied, with 43 per cent of listed companies hitting new 52-week highs in the past six months. But while investors seem to have gotten back into equities, they should remember the fundamentals of value investing. Investors should not be swayed by a run up in the stock price or the reporting of just a few quarters of potentially unsustainable positive growth.

Looking at stalwarts such as Jamaica Broilers Group Ltd (JBG), Seprod Ltd (SEP), Pan Jamaican Investment Ltd (PJAM) and GraceKennedy Ltd (GK), one can easily separate a fundamentally sound company from one whose track record leaves much to be desired. These companies are in a class by themselves, when compared to the “weaker of the bunch” such as Caribbean Cement Company Ltd (CCC), Berger Paints Jamaica Ltd (BRG), Radio Jamaica Ltd (RJR) and The Gleaner Company Ltd (GLNR) that have constantly shown their inability to produce consistent earnings growth.

For example, for the past four quarters, the average earnings growth rate of SEP and JBG was staggering when compared to that of CCC and BRG. SEP grew at a rate of 57.14 per cent (FY 2009), while JBG rose 47.44 per cent, outpacing CCC’s negative growth rate of 93.33 per cent. On the other hand, BRG’s growth rate for the year was astronomically high, increasing at a pace of 314.29 per cent. However, investors should realize that the increase was against the backdrop of the three consecutive quarters of losses in 2008, thus nullifying this “stellar” performance.

It should also be noted that for SEP, the company has not recorded a quarterly loss in at least the past thirteen quarters, while JBG has seen positive annual growth for the past three fiscal years – both feats which cannot be claimed by CCC or BRG. Therefore it’s not surprising that JBG and SEP top analysts’ “buy lists”, while CCC and BRG usually find themselves in less favourable positions.

To be reasonable, one must put the recent demise of CCC and BRG into context. For 2009, the construction sector contracted by 4.6 per cent, prolonging the downturn in the industry. As a result, for CCC, this led to a severe reduction in local cement sales, which fell by 7.96 per cent and 23.11 per cent in 2008 and 2009 respectively, clearly indicating that the rate of decline is increasing year-over-year. Similarly, BRG has struggled to grow revenues from its main product, as paint is considered to be a discretionary item. While the dilemma faced by these firms may not necessarily be within their control, the way they have chosen to deal with these obstacles provides an important lesson to investors.

It clearly indicates that when looking for a company to invest in, one should look for a company that has a diversified product line and that is not wholly dependent on just one sector. Take JBG as an example. JBG, which is traditionally known for its dominance in the chicken industry, is one of the leading ethanol producers in the island through is recent expansion into this market. As a result, the company’s earnings were given a significant boost in the second quarter of 2009/2010, when ethanol contributed over 50 per cent to overall profit – its biggest contribution to date.

Similarly, GK’s business model and consistent focus on growing its asset base and book value has tremendously contributed to positive earnings over the past five years. GK is the leading conglomerate in Jamaica and has interests in food services and the financial and construction sectors – just to name a few. Therefore when First Global Bank Ltd, a subsidiary of GK, was hit with losses of $1.77 billion which arose last September, its parent company was well positioned to cushion the blow with profit from its many other business streams. Additionally, GK’s bottom line has seen only a limited impact, from its construction-sensitive subsidiary, Hardware & Lumber Ltd (HL).

Aside from looking for firms with diversification, investors should choose for firms that are forward looking. GLNR, like many other newspaper companies is faced with the evolution of technology and the internet overshadowing its traditional form of publication – print media. As a result, GLNR is charged with the difficult but necessary task of exploiting additional revenue to ensure the long term viability of the company.

GLNR may be forced to take a page out of Jamaica Producers Group Ltd’s (JP) book when it comes to reinventing its business model. JP, largely identified as the chief banana-producer in the island, was left no choice but to realign the vision of the company, after repeatedly succumbing to the ill-fates of Mother Nature. The decisions to cease producing bananas for export and exit its loss-making subsidiary, Serious Foods Group, were lauded as not only the right moves, but as courageous ones. Since then, JP has reported four consecutive quarters of profit after posting losses in several quarters previously.

The moral of the story is that investors should stick to companies with sound fundamentals, consistent growth and long-term value and should not be overzealous by one or two quarters of growth. At the end of the day, Companies like JBG, JP, GK and PJAM will continue to enhance shareholder value thanks to their established business models and strong management team.

Juvenne Yee is an Investment Analyst at Stocks & Securities Ltd. You can contact her at jyee@sslinvest.com.