Keeping investors aware
7:00am Tuesday 9 March 2010 Philippine Stock exchange Index 3094.98 (+0.826%)
When following the Philippine stock market, it is very important to catch the prevailing mood of investors. The market is here is quite small in both daily value turnover and in the absolute number of individuals and institution who regularly get involved in the market. In my estimation, there are probably around 60 to 65 stocks that are really worth following from a total roster of 240 or so listed stocks. The reason for this is that many of the listed stocks do not trade regularly, even if the company has excellent qualities.
One example is PSB which is one of the biggest and probably the best run savings bank in the country. PSB boasts of a state-of-the-art backroom that is able to address customer needs on a very timely basis. It’s ATM delivery system is second to none and its diversified loan portfolio can stand the scrutiny of the strictest of bank regulators. On top of all this, PSB is a very profitable bank. Why then is there very low liquidity in the stock? I guess the answer is that it is so tightly held by existing shareholders who are afraid to let go for fear of not being able to buy it back again. They would rather hang on and benefit from perhaps regular dividends and a steady increase in the stock’s book value.
Another stock was one which was pointed out by a reader, Mike, who asked me about COAT. He was saying that this stock had a trailing P/E of 7, a Debt to Equity 0.14; a 17% discount to Book Value Per Share… plus consistent dividends (regular and special). Why then was there very little trade on the stock.
My answer for stocks like these would be that a stock does not move on its fundamentals alone. It has to have strong adherents who choose to trade the stock between it cheap and expensive levels. In the more developed markets, there are what are called market makers who follow stocks very closely keeping track of who hold big chunks of the issue. They then try to work with these holders such that they trade the stock from different aspects of value appreciation and then try to further distribute to new investor base constantly so that a diverse view on the stock eventually develops. Unfortunately, something like this would work when the absolute number of market players and investors are huge.
So while we are waiting for this market to get bigger, the way to make money on a consistent risk-reward based process is to weigh most of your trades on issues that would have an average daily turnover of Php 1 million for small ticket trades and Php 5 million for larger ticket trades. This is why stocks like MEG and MPI trade very well; they have a large number of shares being traded and a wide base of shareholders. They also keep the public always aware of what they are doing in order that there is always a reason to trade the stock no matter where the price is going.
A reader had asked me about SMDC as well. It is one stock that has intermittent liquidity unlike its sisters SMPH and SM. Having taken a second look and judging from the success of its property venture, it may just be a good speculative buy. After all, the property story may be a worthwhile speculative play anyway and SMDC may just improve its following with the influence of SMPH and SM. It has had good value turnover since the beginning of the year.
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