Gus Cosio says so

Ideas on the Philippine Stock Market

Aren’t we so lucky

11:35 pm  Monday  10 May 2010  Elections have just passed and the Philippine Stock Exchange Index is on a springboard.

This commentary has to be short today.  I sense that most Filipinos will likely find the elections to have been credible and fair.  Undoubtedly, there were hundreds of voter complaints just as there had been in past elections.  I for one found myself queuing up around one and a half hours in order to cast my vote, but when the voting machine accepted my ballot, I felt that I had just made a slam dunk.  The satisfaction came from the confidence that my vote was actually stored and counted in the computer.

Let me remind you that in this country, elections had always been good for the markets.  I have no doubt that the suffrage exercise of 2010 cannot be declared a failure of elections.  I am not very happy about all the leading candidates, but if that was how the people voted, we just have to accept the results and rally behind the winners.  As a nation, we should now move on and have a common Philippine agenda.

As far as the stock market is concerned, I think it is time to buy up all your favorite stocks because in the next few days, there is no other way but up because the market is still cheap and we have quite a way to go before things become really expensive.  My concern really is that most investors hang on to their positions because the danger now is to sell too soon.  This is unquestionably a bull market that would approximate the strength of the 2009 rally.  As I write, equities markets in the rest of Asia, Europe and the U.S. are seeing triple digit point rallies.  It is because, this time around, Europe is adding to the global liquidity situation through the stand-by swap lines that the major central banks of the west are giving each other.  These swaps are intended to be liquidity measures that central banks can depend on if there are widespread runs on their respective domestic financial systems.  In essence, if there were anticipated monetary tightening in the large economies of the west, all those policy intentions have been put on hold.

The significance of this ample liquidity on our domestic markets is that money which is already abundant locally will be augmented by another surge of global liquidity.  At such level of liquidity, prices of financial assets are bound to rise.  Of course the first ones would be the strongest large cap stocks and I would rate that to be TEL, MBT, AEV, AP, ALI, AC, MER, SM, SMPH, RLC, URC and probably banks like SECB, UBP and PNB.  Anyway, this will be like a rising tide where all the boats go up with the tide.  Aren’t we so lucky to be living at a time when this opportunity comes our way.

P.S.  I am posting exerpts from a research note by JPMorgan on MBT in order to give readers confidence in buying the market today.

Metropolitan Bank, Overweight
Re-rating theme intact, earnings to drive the stock ▲
Price: Php50.50
Price Target: Php60.00
• MBT remains our top pick within Philippine banks. We are raising 2010-11E earnings by 17% and 30%, and introduce 2012 estimates. The 2009-12E CAGR on net profits is 37% post revision and our estimates for next three years are on an average 30% above consensus. Risk /reward trade-off for MBT continues to remain favorable and we expect the bank to continue its last 12 months’ outperformance. Maintain OW.
• MBT is in midst of turnaround and multi-year re-rating, we believe.  A combination of resilient operating profits (up 63% y/y in 2009), aggressive clean-up of books (Php8.8bn of provisions in 2009) and a revamp of credit underwriting processes in the last four years should lead to continuation of earnings turnaround and re-rating for the bank.
• PPOP growth for the bank should be at 14% CAGR over next three years, which coupled with a significant decline in credit costs should lead to 37% CAGR for the bottom-line during the same period. The credit cost decline would be a combination of favorable cyclical positioning and conclusion of overhang from legacy sub-debt write-off in 2010. Php 2.2bn (fair value, net of provisions and residual value)
worth of sub-debt remains in the books at Dec-09.
• Credit growth to be the stock driver in 2010. Post a conservative 2009, where MBT loans were essentially flat, we expect meaningful loan growth this year onwards. SME and consumer should be the main sub-sectors driving growth. Also, we expect corporate bank lendingsector to resume, post last year’s disintermediation.
• We raise MBT Dec-10 PT to Php60 (2-stage DDM derived, previous Php50), as we revise earnings estimates higher. Key assumptions include norm RoE of 14.4%, CoE of 14% and terminal growth of 9%.
Key risks to our view includes slower than expected loan growth and higher than expected reversal in trading income (we have factored in 50% y/y decline in trading income for 2010).
P/E (x)  2010 (est.) -10.9
BVPS (Php/ share) 41.3
Div yield (%)  2.4% Source: Bloomberg, company reports and JPMorgan estimates

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May 10, 2010 - Posted by | Financial markets in Asia

24 Comments »

  1. Hooray for the bull market! Sir, what about the saying, Sell in May then go away? When would it be time to sell? Thanks!

    Comment by charmagne | May 11, 2010 | Reply

    • Charmagne,
      When all the markets are bullish like this, you should not even think of selling. In our market, I’d probably wait for 3500 before thinking of selling.

      Comment by Gus Cosio | May 11, 2010 | Reply

  2. Hi Gus,

    Being new in the market, we have been too cautious and just waited for the effects of the elections on the market. But as you say, the market is still cheap and it is time to buy since there is no way but up. Will the following mix still be good choices for starting investments? TEL for up to P200K, P150k of MBT around 50, P100k of PNB at 28, MEG for another 100K at 1.24, P200K of AP at 13,P150K of DMC at 14.25 and P100K of PIP at 2.90. We are learning a lot from the exchange of comments and your insights. Thank you very much.

    Comment by Bobby | May 11, 2010 | Reply

  3. Bobby,
    I’d buy more MBT than TEL and I would buy anything up to 53. Yes for PNB, but anything below 30 is a buy. MEG is ok at 1.24 but I would consider SM or SMDC. AP and DMC, I would buy at the open. PIP to my mind has only 3.25 as its upside so would put more money into DMC. Remember, DMC just got the MRT-7 and hwat comes with it is the development of 190 hectares of the old Puyat Newtown property in San Jose del Monte, Bulacan not to mention the huge earnings from SCC through Calaca power plant.

    Comment by Gus Cosio | May 11, 2010 | Reply

    • Hi Gus,

      Until what price can we buy for AP, DMC, SMDC, SMPH and SCC? is it still good to pick it up at current market price?

      Comment by Son | May 11, 2010 | Reply

      • Son,
        After presidential elections, our markets have always gone up. These are the percentage rises 12 months after elections.
        May 1992 — up 13.05%
        May 1998 — up 20.30% (despite Erap?!)
        May 2004 — up 27.66%
        I also recall that even in the mid-term elections of 1995 and 2007, the market was strong up to 3 months after elections. 2001 was in the middle of the dotcom bust.
        Your stock selection is excellent. Buy it and wait. By year end, you’d have more money than you need for Christmas presents.

        Comment by Gus Cosio | May 12, 2010

  4. Hi Sir Gus,

    First I would like to thank you for your insights about the Philippine market. It has been very helpful for us which are lesser experienced.

    For my question…
    Given the probability that Noynoy will win this election, would it be good for Lopez and Ayala stocks? How about FGEN, it seems to be badly beaten, will it recover?

    Thanks..

    Comment by Seth | May 11, 2010 | Reply

    • Seth,
      in the next few days, all stocks will move better not only because of our successful elections but also because of the massive liquidity injection in Europe. Markets are fueled by liquidity and confidence. Both conditions just came to be over the weekend.

      Comment by Gus Cosio | May 11, 2010 | Reply

      • Thanks for the reply Sir Gus, it has given me a flicker of optimism.So far it has proven to be difficult to remain objective when one’s portfolio is not performing very well at times like this.

        Comment by Seth | May 11, 2010

  5. Sir Gus,

    The JPMorgan price estimate on MBT is 60, does that mean that if the price hits 60, it should be a good price to sell?

    Comment by JohnTheMan | May 11, 2010 | Reply

  6. John, you are the man.
    JPMOrgan expects 60 but my analyst is looking at 70. When it gets there, we evaluate the forward P/E again to decide whether to buy more, hold or eventually sell. Remember both market and corporate performance are dynamic. You should also have a dynamic perspective.

    Comment by Gus Cosio | May 11, 2010 | Reply

  7. Hi Gus, our bet that there will be no failure of election has been rewarded by the market today.. Impressive performance by AP, AEV, DMC and SCC… Hope the rally continues considering that the rest of the Asian market has slid back to red as the European problem lingers..

    Any thoughts on GMA7 @ 6.90? thanks!

    Comment by mike | May 11, 2010 | Reply

    • I like GMA7, Mike, because it has impeccable management results. They manage production and operations over cost and this is why they are very successful and profitable. Unfortunately, the market is making a statement that the big players in the broadcasting industry is being threatened by a third heavyweight player. While I think GMA7 will still come out very profitable, the market may be demanding a lower PE for the already cheap stock.

      Comment by Gus Cosio | May 12, 2010 | Reply

  8. hi Sir Gus,
    why is there a huge net foreign selling despite good outlook?

    Comment by mark | May 11, 2010 | Reply

    • I don’t know mark. could be that they are re-balancing portfolios. I am more encouraged by the local buying which makes the rally more sustainable. I hope the foreigners come in late so that the locals can take their profits on them.

      Comment by Gus Cosio | May 12, 2010 | Reply

  9. Hi Gus,

    What does a REIT means?(heard that there would be on this yr) Is it an advantage for property companies like FLI? what is the target for FLI?

    Comment by Son | May 11, 2010 | Reply

    • Son,
      REIT means Real Estate Investment Trust. It is advantageous to property companies with a lot of rental income. I have no clue on the target for FLI.

      Comment by Gus Cosio | May 12, 2010 | Reply

  10. Hi Sir Gus,

    “RobinsonsBank has 53 branches nationwide. With the merger, the new commercial bank will be the 14th largest among commercial banks and 31st among all commercial banks and universal banks combined.”

    What is the main difference between a commercial bank and a universal bank?

    Thanks!

    Comment by oliver mia | May 11, 2010 | Reply

    • Oliver,
      A universal bank can do investment banking as well as commercial banking.

      Comment by Gus Cosio | May 12, 2010 | Reply

  11. Looking forward to the continuation of the rally in our market.. Dow is now up 80pts…as of this writing..

    Comment by mike | May 12, 2010 | Reply

  12. Hi Sir Gus,

    Firstly, thank you very much for your insightful (and often profitable) market perspectives and market calls. I told my co-trader friends about your website telling them that this is one of those market commentaries that is very open, helpful and not at all madamot when in comes to information.

    I’d just like to ask something. Does timing the buy order right before a dividend declaration and selling before ex-date count as a trading strategy? Like, off the top of my head, CHIB, TEL and GLO. And if so is this an effective strategy given the current market milieu? And, last question, if not, what is?

    Thanks bunches sir.

    Alfred

    Comment by Alfred | May 12, 2010 | Reply

    • Alfred,
      I actually use that strategy, but it is sometimes difficult to time. Sometimes, the ex-div adjustment may not give you the same compensation as waiting for the dividend considering the trading cost. But then again, it really depends on what you want to achieve. Normally, it equalizes. There is no substitute for spotting a price when it is cheap and lightening up on it when it is too expensive.

      Comment by Gus Cosio | May 12, 2010 | Reply

  13. Sir Gus,

    I currently Hold FGEN, MBT and MPI. Which one should i Hold/Sell??

    My current plan is just to hold on this stocks and sell all of them and then shift 100% to PNB before it breaks out. Do you think this is a good idea? Your insights would be very much appreciated.

    Comment by JohnTheMan | May 12, 2010 | Reply

    • John,
      It is very difficult to time the market. Think PNB will stay arounnd 30 for a while. when you have a profit on MPI, sell it then move to pnb. I think FGEN and MBT can do better than MPI in the next 3 months.

      Comment by Gus Cosio | May 13, 2010 | Reply


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