Gus Cosio says so

Ideas on the Philippine Stock Market

Who’s bragging?

2:15pm  Friday   16 October 2009  Philippine Stock Exchange Index  2922.82  (-0.68%)

In the U.S., they’ve been seeing positive earnings surprises over these past few days.  The surprises have served as catalysts for buying that pushed the Dow Jones Industrial Average past the 10,000 mark.  The PSEi normally followed strong New York closes at the open with strong prices.   Unfortunately, in this entire week, whatever strength there was in the market early in the trading session was met by a steady wave of selling.  Are Philippine investors getting worried at this point?  Have stock prices gone too high already? Have the reasons for getting into Philippine stocks consequently vanished?

If we look at the Lehman collapse as our reference, our market is well above that level to conclude that we have recovered from recession blues.  We can safely say that in as far as the market perceives financial conditions, we have overcome all the fears associated with the potential financial meltdowns.

However, is the market throwing all caution to the wind having gone this far while economic growth in the Philippines has not yet caught up with last year’s?  Personally, I think not.  Investors have been very prudent avoiding to push stock prices to inflated levels.  The only possibly over-valued stock from a historical perspective would have been MER; but one can argue that MER had been undervalued for a long time because the controlling shareholders had swamped their companies with debt in trying to expand their other businesses.  At it stands now, MER’s shareholder structure has changed and the debt burden is no longer as troublesome.  Even those related companies such as FGEN and EDC have significant debt reduction clearly showing in the horizon.  I am one to think that MER should actually trade expensively with the rest of the market because its earnings are ridiculously steady and its business franchise covers an area that produces over 50% of the country’s GDP.

Meanwhile, TEL had recently surged from 2300 to above 2600 and is now settling a shade below 2600;  has TEL gone beyond itself?  My take is that TEL may still be undervalued at this point.  My numbers tell me that it is trading less than 12X recurring earnings and will still be able to pay dividend yield of close to 7%.  How can that not be undervalued as the country’s largest private enterprise in an industry that is almost like a public utility?

We can go down the line, AC, AP, MWC, DMC, the banks, the consumer stocks, the property stocks, small cap stocks; most of them have been traded even at a discount to their fair value as measured by earnings and price to book values.     So why is the market dragging its foot?  Why isn’t there any follow through to the break-out from 2900 seen on the second week of October?

I think it is because the temperament of the critical mass of investors has changed.  In past years, the market had been dominated by foreign funds.  Foreign funds are very opportunistic and impassionate.  They simply look at returns and when they’ve earned it, they flee.  This time around what we are seeing is the absence of foreign funds and even the outflow of funds from existing investments.

The dominant investment psychology is different nowadays.  I was looking at the performance of UITFs of banks and the mutual finds and what I saw was double digit returns not seen by local investors for some time.  Mutual funds, in the industry’s current state, have only existed in this country for just about 10 years.  In 2006 and 2007, fund investors had seen double digit returns that they thought was not available in the Philippines.  Of course, 2008 was such a bad year that the industry had contracted.  UITFs on the other hand had it very badly in its infancy in 2006 that investors avoided them for a while.  Recently, with a good number of funds returning 30, 40, and 50 percent year to date returns, investors just do not feel the urgency to opt out.  As the news spread around from happy investors, more money looks to be pouring in to these funds, giving more confidence to local fund managers.

So what I can surmise from the recent price movements is that the local fund managers are just preserving the returns for their investors.  If they preserve their high double digit returns at this point, they will have bragging rights for the rest of the year and possibly be more successful in marketing their funds.

One thing for sure, the local component of this market is a lot bigger today than it was this time last year.  Given that people have made money so far this year, they will be more inclined to take bolder moves in the market should we pull back some more.

So why are people selling?  It’s the old adage working, “a bird in hand is better than two in the bush.”

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October 16, 2009 - Posted by | Financial markets in Asia

9 Comments »

  1. Hello Sir Gus, it’s me again… I’m very hesitant to ask about this, but i guess i’ll give it a shot.. since I’ve invested a huge amount in this company, and am still up 30%…. what do you think about VLL?

    Comment by Wren | October 16, 2009 | Reply

    • Hey Warren,
      I think you’ll still make money with VLL because I think FLI may lose steam because of a number of their properties being located in flood prone areas. VLL on the other hand are in the Cavite, Muntinglupa, Cavite areas which I hear had not been affected by the recent floods. I have an idea for you if you want to stick it out on as stock that could go, but you have to be patient. It is PSB, a not so liquid stock but whose company fundamentals are excellent. I make no promises except that it is a very undervalued stock. You notice how a stock like AEV was illiquid most of the time. If you bought AEV on its weak side, you’d always get out at a profit. I think, same thing could happen to PSB.

      Comment by Gus Cosio | October 17, 2009 | Reply

      • Wow! Thanks Sir Gus, ehehehe. i’ll keep that in mind… I think i’ll just stick it out with vll for a while..

        Comment by Wren | October 17, 2009

  2. Hi Sir Gus,

    What do you think of OV? Oil has been going up lately and the Galoc project has been quite successful this year.

    I wonder why TKC isn’t making a move while steel prices have been going up. Do you have any reason in mind?

    Thanks!
    -Warren

    Comment by Warren | October 19, 2009 | Reply

  3. Warren,
    I have some OV in my portfolio. It’s a slow mover but could be a worthwhile hold. Be sure to take profits every now and then with a portion of the position in order to earn some return on the holdings.
    TKC will likely be a drag until things pick up. I’m not sure how they’re doing this year but the company is very sensitive to overall construction spending. Also they have the pipe making in China which could be putting a drag on profits. Nevertheless, This stock spikes up towrd year end. You could sell into that spike and average down later.
    Gus

    Comment by Gus Cosio | October 19, 2009 | Reply

  4. you have a lot of fans named Warren sir Gus 😛

    Comment by wren | October 19, 2009 | Reply

    • You are too kind, Warren.

      Comment by Gus Cosio | October 19, 2009 | Reply

  5. haha yeah, im also a fan of gus! omg i wanna be a financial analyst! its sooo cool! im definitely going to invest with FAMI equity this year for Gus Cosio recomended it. thnx Gus!

    Comment by kenny | January 14, 2010 | Reply

    • Hey Kenny,
      Be sure to do it early so you can catch the big move.

      Comment by Gus Cosio | January 14, 2010 | Reply


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