Gems and garbage

10:05 am  Tuesday  22 September 2009   Philippine Stock Exchange Index   2,779.24 (down 10 points in early market trades)

If you view the market from Friday, September 11, when the index closed at 2871, you’ll see that for most of last week what was going on was a consolidation.  On Monday the 14th, the index opened at 2853 and progressively declined to 2755 which was Friday’s low.  After half hour of trading on the 18th, the index started to rebound and the market closed up 17 points.  What we actually had was a rebound of TEL and MER after both stocks had tanked – TEL a low of 2300 and MER of 163.  TEL closed 2325 and MER closed 170.  Other large cap stocks – AC, ALI, SM, MBT, & BPI – had steadied.  Other popularly traded stocks – FPH, EDC, FGEN, MEG, AGI, AP, & FLI all recovered marginally.

Among the second liners, you also saw a pull-back in WEB, ISM, TUNA, SPH, & SECB while PNB & PIP have steadied.

Our market cannot avoid but be influenced by the global markets which are all expecting a consolidation from a very strong six months from March.  I guess what investors are asking is whether or not we can be rewarded by stocks at these prices.  I would like to focus then on two apparently diametrically opposed stocks which strongly influenced last week’s decline – TEL and MER.  TEL, in my measure, is trading just below 10X 2009 earnings and has potential dividend yield of close to 9%.  I think that is very cheap except that there are perceptions that politics is affecting the price and perhaps the group’s investment in MER might weigh down TEL’s earnings.

On the other hand, MER is trading 27X 2009 earnings. That is pretty demanding although on its 2010 earnings it drops to 18X which is not really cheap.  What is making MER expensive is the limited supply of shares in the market as most of the float has been taken by competing interests for control of the company.  I earlier thought that MER would trade between 190 and 210, but having broken that range, I reckon that it is looking to head a lot lower.  On further reflection, the price recovery last Friday pointed out to me the scarcity value which the market will likely attach to MER ,thereby tolerating a PER slightly higher than market.  An example of such a situation is ALI which has on all occasions traded at an earnings premium  to the market because of its high NAV and position as the premier property developer in the country.  MER, in fact, is the premier utility in the country being the franchise holder of the Mega Manila geographical region.  Thinking about it more thoroughly, I would attach a strong premium to that fact, after all, 60% of the country’s GDP is generated by Mega Manila.

I would watch both MER and TEL for entry prices.  It is hard to walk away from value and it looks to me that TEL is there already while MER is slowly approaching.  In the end, TEL and MER do not look like they are diametrically opposed after all.

As far as the broader market is concerned, it seems that globally, equity markets are coming to a head with the economic outlook.  Having recovered from their lows and seeing that the strongest bull run this year which was Shanghai has been correcting, investors are becoming extremely cautious and are preserving cash for whatever pull-back there is to come.  This kind of outlook reflects the sentiment that investors are re-evaluating values and are not going to jump into the market simply to join the bandwagon.  We are moving into a changing economic environment and markets will always be forward looking.  Having predicted the recovery, the market is now in the process of making the next prediction and I believe that it will return to basics – company fundamentals and earnings growth.  Again, I will re-assert my continuing recommendation to investors – keep on following the individual stocks for whatever gems or garbage they have.  That should determine your buy or sell decisions.