Gus Cosio says so

Ideas on the Philippine Stock Market

When the problem does not want to go away

10:15 am Tuesday 18 May 2010   Philippine Stock Exchange Index 3266.20 down 27 pts

With the global markets becoming more volatile, it is very probable that the same instability in the markets could come to local stocks.  Just to put things straight, the troubles in the global financial markets are not arising from companies going bad but from sovereign states losing control over their finances.  Actually, the situation in Europe have very strong fundamental undertones wherein sovereign states agreed to conform to specific macroeconomic limitations which not only they did not live up to, they even fudged up their figures to pretend that they did.  That is why the Greek problem simply cannot go away.

When the Europeans crafted the Euro as a common currency, they gave themselves a 10 year head start in order to give individual governments a chance to strengthen their respective domestic economies.  The agreement was that member countries would bring their economies into balance of payments and fiscal positions of inside +3/-3%  of GDP.  Furthermore, inflation should be inside of 3% in these years preceding the creation of the common currency.  The continuing sovereign commitment was to keep the macroeconomic targets within these conditions.

All that is history now.  Greece has gone way out of the playing field as they continued to pursue populist policies.  You cannot keep your fiscal and trade balance if you coddle your population and grant entitlements that they cannot pay for.  That is true for any government.  That is why communism fell in the late 1980’s, and that is why China while avowedly communist has been pursuing very market responsive (read capitalist) economic strategies.  They have been persistent in maintaining surpluses in both fiscal and balance of payment positions.  At the end of the day, when both positions are in balance, the economy will be able to hold its own.

In this country, we are fortunate that while our fiscal position is in deficit and is expected to be in that position for at least 2 more years, our current account and balance of payments are in surplus.  Furthermore, our government’s debt as a percentage of GDP is only around 35% of GDP compared to around 120% of GDP in Greece.

The question is whether or not our market will be badly hit if global volatility continues.  I think that we are being affected already.  In spite of good results that have been disclosed, our market has not really forged ahead in proper proportion.   AP, AEV, DMC, MBT and PNB reported earnings that were reasonably strong.  I think these shares will be well underpinned by their full year earnings prospect.

The disappointing results came from AC whose 1Q10 net profit slid by 2% to Php2.11bn.  The decline was due to an 8% Y/Y reduction in equity earnings from core businesses –  BPI’s income  declined 5% Y/Y and Globe’s dropped 26% Y/Y.

I would recommend that if you hold AC, BPI, GLO and MWC to sell these and look to switch into the stronger stocks.  I would sell MWC and buy DMC.  I would get rid of my AC and buy MBT.  I would sell GLO and perhaps split the proceeds between TEL and DGTL because in my impression PLDT has managed to keep its market share while Globe has lost some of theirs to Sun.

I would also use the market’s weakness to put cash into these same companies.  I would not be in too much of a hurry to build up positions because I think that aside from the weakness of global equities, the domestic market will have some jitters because of the rumblings in the political arena.  I do not look to kindly to congress moving the presidential proclamation to June 4 from May 30.  I do not see why they did not even move it earlier.

For those who do not have the time nor the patience to wait for this market to turn, may I suggest that you consider putting some money in an equity mutual fund.  In a mutual fund, the fund manager is always following the market which means that your money will be there for the ride when the market surges again.

To learn more about mutual funds click on:  http://www.save-and-learn.com

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May 18, 2010 - Posted by | Financial markets in Asia

55 Comments »

  1. Hi sir gus! Nice post! very informative especially for those waiting for the market to go up hehehe

    Comment by wren | May 18, 2010 | Reply

    • Wren,
      I can’t say that this market will not decline further. Sentiment is more difficult to gauge compared to good stock fundamentals, economic developments, and technical conditions of the market. If all these are positive but sentiment is negative, it is a good time to go contrarian.

      Comment by Gus Cosio | May 18, 2010 | Reply

  2. Sir Gus,

    Interesting thoughts on AC and portfolio. While its cash hoard is admirable, its valuation at 21++ 2009 PE maybe that of a growth stock in Phils setting. And basing on 1st qtr 2010 result, that may hardly be the case. While ALI have huge capex onwards, in its efforts to close deals, it maybe investing and buying something at a sizeable premiums.

    Globe maybe in for rough years going forward. I am of the opinion, that post paid line subscribers, those high ARPU, will continue to be acquired by sun cellular.

    It is human nature that all things equal, the cheapest one will attract more.My example, if you are a mid level employee, you take the bus or the MRT to work not a taxi every day.Sun cel is the bus or MRT, the other company, the taxi.

    Regards,

    Comment by alex | May 18, 2010 | Reply

    • Alex,
      Just for your information, the other conglomerates were tiny compared to AC 10 years ago in terms of total revenue. Today, companies like AEV and SM earn a lot more than AC. AC is resting on its past laurels and its prospect for growth is not at all impressive.

      Comment by Gus Cosio | May 18, 2010 | Reply

      • Thank you sir for the insight. Such are background that I dont have being a bit new in stocks.

        I had studied JGS a bit further and seems to notice increased volume in trading (although some are day traders).I saw that with RLC and URC months before, before their prices went up.

        Its topline revenue also grows quite steadily over the years. And its slow but steady entry in cellular and airline is impressive. It changes the way business was done
        favoring the consumers because of lower prices.

        I read a book before to the effect that one way to test long term prospects for companies is to ask what would have been the business environment had this company is not around?

        For JGS the answer would have been that airline flight to manila would still be P2,500 at least, one way and cellphone use P6.5 per minute, same network call.

        Such a company is worth looking at for investments dont you think?

        Thank you.

        Comment by alex | May 18, 2010

      • Alex,
        I agree completely. JGS was in very good favor in the early 1990’s but lost favor later in the decade because it had several companies in its portfolio that had a huge drag on earnings. In the last 5 years, the situation has changed dramatically with its various businesses blooming where they stand. The leaders would be RLC and URC. I would take a look at DGTL again. This was a stock that I favored about 12 years back because of its telephone backbone in Luzon. Today, with Sun Cellular having 10 million subscribers, DGTL may be worth another look. It goes without saying that JGS should be taken a lot more seriously by investors.

        Comment by Gus Cosio | May 19, 2010

    • These are strong points, Alex. JGS is definitely succeeding in acquiring market shares in mature markets such as telecoms (85% penetration rate) & airlines through price leadership.

      Moral lesson: It pays to have Sharon Cuneta endorsed your company. Lol!

      Comment by James T. | May 18, 2010 | Reply

      • James,
        I think the Gokongweis are not people who pioneer new industries. They, however, have a good track record in carving market share from industries that could use added capacities.

        Comment by Gus Cosio | May 19, 2010

  3. Hi Sir Gus,

    Which one is more liquid? AP or EDC?

    thanks.

    Comment by Jojo | May 18, 2010 | Reply

    • Jojo,
      EDC is more liquid than AP, but for small investors, it hardly matters because both stocks average over Php 100 million value turnover.

      Comment by Gus Cosio | May 18, 2010 | Reply

  4. is it ok to enter MBT at 56?

    Comment by Mike Tan | May 18, 2010 | Reply

    • Mike,
      I see the stock at 70 at year end or earlier, but buy when you are comfortable.

      Comment by Gus Cosio | May 18, 2010 | Reply

      • bought MBT at 56, thank you for the advice sir Gus!

        Comment by Mike Tan | May 18, 2010

  5. Hi Tito Gus, What will happen if Euro goes parity with dollar could this result to hyperinflation in Europe? 18 months ago 1 euro=69.55 pesos today its only 54.85 pesos per 1 euro.

    Comment by Nina | May 18, 2010 | Reply

    • Nina,
      personally, i think it will be good for the euro to drop to parity with the US$. it will lower global inflation.

      Comment by Gus Cosio | May 18, 2010 | Reply

  6. Sir Gus,

    Have you heard anything about BPC. It’s price action is quite fishy lately and I sense some kind of surprise to the upside. What do you think? FPH has been doing well also. I have both, including FGEN and EDC, but I’m thinking of rebalancing more towards BPC. Would you happen to have the 2010 forward pe of BPC?

    Thanks.

    Warren

    Comment by Warren | May 18, 2010 | Reply

    • Unfortunately, I do not have any information on BPC. Instinctively, because it is parent to FPH and ABS which are both doing well now, I am not surprised that it will go better. I think it could go to around 4.50 or so.

      Comment by Gus Cosio | May 18, 2010 | Reply

  7. Hi Sir,
    Need some advise on portfolio mix. At present, I have 55% invested in power stocks and balance is in MPI. Was able to dispose my AC earlier. If I were to plan at 6-8 months horizon, shall I add more on the banking/financial sector? I understand PNB/MBT are 2 possible avenues to go. I still have ample cash on hand exqivalent to 25% of my current portfolio.
    All the best, Mark

    Comment by mark anthony | May 18, 2010 | Reply

    • Mark,
      You can replace your AC with MBT since both are large cap shares. MBT based on research that I’ve seen should be worth around 70.

      Comment by Gus Cosio | May 18, 2010 | Reply

  8. Hi Gus,

    What do u think of PX @ 11? thinking of buying it at even lower like 10.50 ifever it goes down there..

    Today made some quick moves on the blues.. sold MBT @ 57 – bot again 56, sold JGS 13- bot back 12.5, sold DMC @ 16 bot enter again @ 15.5.. what do u think of this strategy Gus.. just taking advantage of the wild swings..

    Comment by mike | May 18, 2010 | Reply

    • Mike,
      on PX, I think that it is now cheap even at 11, so 10.50 should be an excellent buy if it even gets there. With the anticipated weakness of the market, it could get there.

      As to chrurning your position, as long as you are making money and trading turns you on, just do it. Do the math also so that you do not pay too much brokerage or taxes.

      Comment by Gus Cosio | May 18, 2010 | Reply

      • I normally sell my position it it’s 2% or more net profit for a quick trade..

        Comment by mike | May 18, 2010

  9. by the way Gus,, has GMA7 released their Q1 results yet? what do u think will the numbers be considering the revenues coming from last election?

    Comment by mike | May 18, 2010 | Reply

    • Mike,
      GMA7 results will be out today.

      Comment by Gus Cosio | May 18, 2010 | Reply

      • Hi Gus,

        GMA7 Q1 result is out…(855M NI) 71% growth on net income YOY.. 29% R0E…

        Comment by mike | May 18, 2010

  10. Hi Sir Gus,

    I bought RFM today at 1.06, do you think this stock will move up further? It hits a high of 1.12 today. Any idea why it moves up consistently in the past few days,together with SFI.

    Thanks

    Comment by Romy | May 18, 2010 | Reply

    • Romy,
      Unfortunately, I do not follow RFM or SFI because they have a ver small following. Unless they organize an investors briefing indicating that they are interested in nurturing their investor base, I have little hope for these stocks. I’d rather buy URC in the consumer and food sector.

      Comment by Gus Cosio | May 18, 2010 | Reply

    • Hi Romy, Rfm is good if u know how to trade the stock i bought earlier @ 60 cents/sh more than one month ago and i sold it already last week 94 with a gain of more than 50%..i think the stock is over bought already that’s why i sold it…

      Comment by Nilo | May 18, 2010 | Reply

      • I think part of the rapid rise of RFM is probably attributed to the remarks of RFM president that its stock price should at least be worth P2.00 or so. Plus, reversal from last year’s loss. These both probably piqued the interest of some investors and pushed up the price in the last couple of days.

        Comment by James T. | May 18, 2010

  11. Sir Gus,

    With the current performance of JGS, I would like to ask your opinion about it. Doing my homework, its 1Q2010 report said it had a 410% increase in net income compared to 1Q2009. Full year 2009 income went up 1400% as compared to 2008. Book value as of Mar. 31, 2010 is at P12.88/share, current price as of this writing is at P12.50/share. Very cheap! I’m considering to buy this stock in the next trading days.

    What do you think sir?

    Thanks!

    Comment by Norlan | May 18, 2010 | Reply

    • By all means, Norlan. With volume of trade increasing on the stock, I am hopeful that liquidity of JGS would increase. I hope investor mindset would also be more favorable to JGS.

      Comment by Gus Cosio | May 19, 2010 | Reply

  12. Hi Tito Gus, I still Believe PSE will go up to 3800 level before the year ends …Only the Chinese and US Market is in a Bear Market.

    Comment by Jo | May 19, 2010 | Reply

    • You and me bot, Jo. There would be ups and downs, but I believe that we are still in the up swing of the current business cycle in spite of the global disruptions coming from Europe. In the U.S., housing starts have started to creep up which is an encouraging indicator for a sustained economic recovery.

      Comment by Gus Cosio | May 19, 2010 | Reply

  13. Sir Gus,

    Would you be a buyer or a seller right now?

    Comment by JohnTheMan | May 19, 2010 | Reply

    • yes John, I am. I have been posting at the base of DMC, AP and MBT.

      Comment by Gus Cosio | May 19, 2010 | Reply

  14. Hello Sir Gus,

    The market sentiment is still negative despite the bailout of greece, where do you think this fear is coming from?

    Comment by wren | May 19, 2010 | Reply

    • Wren,
      I think that this is a healthy fear. If you notice, the global markets had been rallying since February with out any major consolidation. I think what is going on is investors selling on news of good results because they bought when it was only at the expectation stage. I do not think that there will ba a major downturn simply because there is enough money out there and earnings are simultaneously stabilizing. The fear comes from anxiety that Europe will be consuming less thereby deflating global demand. That could happen, but the regions in Asia – China, India and the ASEAN – which have a combined population of more than 3 billion people, are growing consumer markets. It will just be a matter of time.

      Comment by Gus Cosio | May 19, 2010 | Reply

  15. from where i look at it, we are being given here a golden opportunity to pick excellent companies at very attractive valuations ( AEV, AP, DMC, MBT, JGS, PNB).. in this current environment, im a buyer of the abovementioned companies.. this is the time to be greedy and should be fearful when everyone is excited talking about stocks.. :).. lets remember that the fundamentals of these companies are looking great as ever.. it’s the stock that is broken not the company..

    Comment by mike | May 19, 2010 | Reply

    • if your comment wasn’t loaded with old cliches, i’d believe you. 🙂

      Comment by Jack | May 19, 2010 | Reply

      • fortunately, im still 50% invested.. waiting for the big drop to come to take more positions… 🙂

        Comment by mike | May 19, 2010

  16. Sir Gus,

    Do you think MPI could still go back to 3.2? I failed to take profit during its highs. 😦

    Comment by KennyV | May 19, 2010 | Reply

    • Kenny,
      I think the range for MPI is 2.80 to 3.25; you’ll know what to do the next time.

      Comment by Gus Cosio | May 19, 2010 | Reply

  17. Hi Sir Gus,

    Thank you in behalf of your avid readers for taking time to read and respond to all our questions. You are very kind.

    EDC puzzled me this past few days. I was expecting it to go up with its good earning reports. But it went the other way around and foreign fundies (like 209 this morning) now seem to be rushing out. Grateful if you could share your thoughts on this. TIA.

    Comment by Karl Vincent Catalan | May 19, 2010 | Reply

    • Hi,

      It maybe profit taking on edc and institutions would sometimes sell when there is demand that can absorb and there would be after the report on good 1st qrtr 2010.

      Thanks

      Comment by alex | May 19, 2010 | Reply

      • Karl,
        I would tend to agree with Alex. Actually, you must realize and accept that stock prices go down most of the time when you buy something. You are not alone in that situation. The market rewards thse with staying power. Anybody who claims he makes money with every trade is a liar. They are those who know how to manage losses that make the most otu of the market.

        Comment by Gus Cosio | May 20, 2010

  18. Hi Sir Gus,

    I’ve been following your blog silently for sometime now. It is very informative, useful and profitable as well. I am a beginner stock market investor, would you be able to recommend some good books about fundamental analysis to beginner stock investors like me?

    Thanks,
    James C.

    Comment by James C. | May 19, 2010 | Reply

    • James,
      there are so many books on fundamental analysis. My suggestion is that you browse some and pick the simplest and easiest to comprehend.

      Comment by Gus Cosio | May 20, 2010 | Reply

  19. Sir Gus,

    What is your take on AGI? At 11++ trailing 2009 PE, with growth drivers Meg and Macdonalds, is it expensive on Phils setting? I dont quite understand the casino project that they have, its contribution to 2010 and 2011 earnings. Would appreciate if you have input on it.

    Regards

    Comment by alex | May 19, 2010 | Reply

    • Alex,
      I do not have the details on hand, but I recall that analysts are looking for a doubling of revenues in the gaming business in 2010.

      Comment by Gus Cosio | May 20, 2010 | Reply

  20. Hi Sir Gus, Do You believe when one market is very expensive the other market is very Cheap…I think the Euro and dollar is very cheap right now and most Stocks are Expensive.

    Comment by Nolly | May 20, 2010 | Reply

    • Nolly,
      Cheap and expensive are value concepts. The reason why one asset is cheap versus another is that nobody wants it at that point in time. Other assets are expensive because many desire the particular asset. The Euro is cheap right now because nobody wants it because people think it should be cheaper. The Peso may be expensive right now, but that is because those who used to have a lot of US dollars choose to have assets now in pesos. What is important is that when an asset because too cheap that there is no other way to go but up, you are able to spot and act on it.
      As for stocks, I don’t think they are expensive. considering the earnings prospect and the returns on other financial assets, I think stocks are cheap. For that matter, I think the US$ and the Euro are expensive.

      Comment by Gus Cosio | May 20, 2010 | Reply

  21. Hi Gus,

    I would like to ask for your thoughts on ALI. It seems the shares has been quiet for some time now. Do you think it’s due to go up anytime soon?

    Thanks!

    Comment by Jared | May 20, 2010 | Reply

    • Jared,
      Yes I think ALI will be moving up, but will it be an outperforming stock? I think RLC could do better among property stocks.

      Comment by Gus Cosio | May 20, 2010 | Reply

  22. sir Gus,
    Is it time to sell? Dow is down 300 points tonight…..

    Comment by charmagne | May 20, 2010 | Reply

    • you need not worry about this

      Comment by cliffhanger | February 20, 2011 | Reply


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