Gus Cosio says so

Ideas on the Philippine Stock Market

Spurts and outliers

11:45am  Friday 11 June 2010  Philippine Stock Exchange Index  3253.78

What I am seeing is a market that wants to move higher but gets fidgety whenever external factors, notably Europe and the U.S., show their ugly economies.  Actually, I am not convinced that it is all that bad after seeing the huge rise in China trade figures announced yesterday.  China’s exports jumped an unadjusted 48.5% in May from the same month a year earlier, while monthly imports surged 48.3%.  The question that nags me is “who is buying and who is selling?”  The U.S. consumer is not buying new houses, cars and refrigerators (consumer durables), but nobody has stopped shopping at Wal-Mart or Safeway.  The point is, the average American still has to buy the day today supplies and gadgets, many of which are produced in China.  Same thing goes for the European consumer; their wine may not come from China but their sneakers and laptops do.

So the developed economies are slowing down, but it does not imply that trade with selected regions will drop drastically.  Life will go on and old habits die hard.  Asia will continue to sell to and buy from the developed world.  Moreover, they are now selling and buying among themselves as inter-regional trade has been growing.  Economic activity in East Asia, including the Philippines, will maintain a growth path.  We’ve seen it in Indonesia, Thailand and Singapore, not to mention our own 7.3% GDP growth.

The more important fact that remains is that we have stocks that are so much of a bargain.  I’ll talk about two stocks today – EDC and PNB.

The power sector has a very compelling story simply because the Philippines needs to add to present generating capacity.  The existing reserve generating capacity is only 3% of demand.  That margin is very thin and needs to be raised to at least 10%.  That is why the rise in price of AP and SCC is relentless.  Now, EDC is the only geothermal operator in the country and its cost is similar to the hydro generators.  In short, EDC will have strong revenues and returns over the next 2 years or so.

Price-wise, it appears to be trading in a range between 4.60 and 5.60.  As I write, the stock is trading at 4.70.  It has a lot of room to make it to the top of the range in a month or so.  One can make a 20 – 25% return over a period of 30 to 60 days.  That’s not so bad.

For PNB, I think that the merger with Allied is a lot closer today than has ever been.  At a price of 29,  PNB is trading at 0.58X book value.  When it merges with Allied, the book value has nowhere to go but up.  Again, this merger could happen in the next 3 months, in which case, the price of PNB could rise to 40.  That is around a 34% over 3 months which is not a bad bet.  PNB has cleaned up its balance sheet.  It has good management and it has good franchise in the markets it serves.  For one, it still has the widest remittance network among Philippine banks having been the first mover years ago in this market.

I think we will have a market that will have spurts, as we have seen today, occurring regularly as we work on a consolidating trading range for the next few weeks.  That is not to say that there will be outliers that will fuel the spurts.  Right now, my bet is on EDC and PNB.

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June 11, 2010 - Posted by | Financial markets in Asia

38 Comments »

  1. Sir Gus,

    Do you think EDC is better to own than FGEN?

    PNB takes 50% of my portfolio, i wouldnt mide adding positions in the nxt payday if the price stays around it’s current levels. 🙂

    Comment by JohnTheMan | June 11, 2010 | Reply

    • Right now, I am in EDC, John.

      Comment by Gus Cosio | June 11, 2010 | Reply

  2. i would’nt mind*

    Comment by JohnTheMan | June 11, 2010 | Reply

  3. Hi Sir,
    Just need you thoughts on my portfolio split ie.67% -power(EDC,MER,FGEN) , 15% bank (PNB,MBT) and 18% holding (MPI). Do you see opportunities where I can boost or other sectors I need to add. Thanks

    Comment by Mark Anthony | June 11, 2010 | Reply

    • Don’t be greedy, Mark. Be patient. You have a very good portfolio. Trade out of MPI when it approaches 3.20-3.25 or try to pick up some DMC.

      Comment by Gus Cosio | June 11, 2010 | Reply

  4. Hi sir Gus, I think the GDP is a fake…it was goodbye present to Mrs.Arroyo by her loyal appointed supporters…Most companies are not hiring now…I think 2011 will be a bear market….still holding my stocks that i bought last year planning to sell everything if PSE goes above 3450…

    Comment by val | June 11, 2010 | Reply

    • Val,
      No ofense to you, but I trust our NSCB more than that. They have no reason to please GMA because in a few weeks, she is no longer the boss. Furthermore, other indicators which they cannot monkey around with like Meralco electricity sales are dramatically up especially among industrial users. Exports a d remittances are also dramatically up. Our exports are supported by import figures from China and Singapore. In a recovery, companies do not hire right away, so the reason for better margins. With the hike in wages, companies will just pay overtime rather than hire new employees.

      Comment by Gus Cosio | June 11, 2010 | Reply

  5. Sir Gus,

    I attended FMSBC/FAMI’s “Money Talks” at PSBank this afternoon. It was great to see you in person, i was kinda shy to introduce myself, i was the young guy in black shirt. More power to you and your fellow investor buddies!

    Comment by JohnTheMan | June 11, 2010 | Reply

    • Thank You, John. Good luck with your trades.

      Comment by Gus Cosio | June 11, 2010 | Reply

  6. Hi Gus,

    I was at the investor briefing as well. I would like to say thanks for the somewhat short but very insightful presentation you made. Like my boss always says, “Less is more”. I hope this weekend will serve as the countdown for the moon launch of the PSE.

    Comment by richard | June 11, 2010 | Reply

    • I’m glad that you took something home with you from the briefing, Richard.

      Comment by Gus Cosio | June 11, 2010 | Reply

  7. Hi Sir,

    I have decided to clean up my holdings and focus more on what I see as solid stocks. Majority of my holdings are now into EDC,PNB,JGS and a small part to RCB. I have decided to add more funds to these companies due to their good potential this year. Considering my holdings, should I keep adding to my positions or would you recommend that I diverse to something else? I feel confident that these companies would do well during this year but adding more funds to them made me think again..

    Thanks!

    Comment by Andy | June 11, 2010 | Reply

    • Andy,
      Perhaps you should add DMC to your portfolio just to your portfolio just to add more weight on infrastructure because DMC owns part of Maynilad, Semirara (which owns Calaca and DMCI Homes) and the SCTEX and MRT 7.

      Comment by Gus Cosio | June 15, 2010 | Reply

  8. Sir Gus, I hope you can enlighten me as regards the taxation procedure for investors like us. I’m still new in stocks investing I’d like to know if we have no other taxation obligation aside from what’s charged of us by the brokerage firm.

    My stocks is not that much but I check my investment position online often. Is it okey to trade often as an ordinary investor even if I am not a trader? can you please guide me the legal basics in investing for an ordinary investor with an online account.

    Thanks a lot and God bless.

    Comment by newbie | June 11, 2010 | Reply

    • Yes I was wondering the same thing because we have the same predicament. I’m a nurse by profession and I know little of how taxation works in an online account since it was not clarified with my online broker. I’ve earned about 33% since late february, taking profit with every 5-10% gain and have everything invested right now in equities with the little that I have. Even if I dislike the government for all its thievery, I’d still like to pay my obligations, hoping that my taxes somehow trickle down to the true needs of our country. Anyone kind enough to answer this? (Sir Gus I appreciate your blog very much, it has helped me make good trade decisions, God bless! )

      Comment by Dennis | June 14, 2010 | Reply

      • Gains from sales of stocks listed in the stock exchange are exempt from Capital Gains Tax. The tax obligation has already been satisfied the moment you sold your stock positions with the deduction of the stock transaction tax.

        Comment by bunny | June 15, 2010

      • That is correct, Bunny. We, stock investors, pay taxes on both income and losses.

        Comment by Gus Cosio | June 15, 2010

      • Dennis,
        I admire your civic mindedness about individual tax liabilities which is a rare commodity in this country. I for one try to fulfill all my tax liabilities to the government as a matter of principle. That way, I can criticize all forms of corruption without a stain in my conscience. Fortunately, all stock transactions are subject to a final tax which is levied at the time of stock sale – win or lose. In effect, you have paid your obligation on anything you’ve earned from trading stocks.

        Comment by Gus Cosio | June 15, 2010

    • Newbie,
      The good thing about stock trading is that it already has a final tax collected when you sell a stock – win or lose. You have no tax liability after although you pay tax even if you lose.

      Comment by Gus Cosio | June 15, 2010 | Reply

  9. Gus, I hope next time you can post a video or something that OFW’s like me can virtually attend your seminar. 😀

    Thanks.

    Comment by Ryan | June 11, 2010 | Reply

    • We’ll see what we can do, Ryan. Certainly, I’d like to reach out to OFWs.

      Comment by Gus Cosio | June 15, 2010 | Reply

  10. Hi Gus,

    Thanks for the insights you shared at this afternoon’s investor briefing. More power to you and God bless.

    Comment by Carlos Castellon | June 11, 2010 | Reply

  11. Dear Gus, I’ve read that there was a changing of leadership at BPC? Is this a good omen or not for those presently holding BPC stock or those planning to buy?

    Thank you very much sir!

    Comment by joseph | June 12, 2010 | Reply

    • Joseph,
      I think the move of Manolo Lopez to BPC is likely to put more focus into improving BPC’s portfolio of businesses. Surely, they are trying to resolve their debt issues.

      Comment by Gus Cosio | June 15, 2010 | Reply

  12. Hi Sir Gus,

    Is it a good time to buy DGTL (closed at 1.66) and AP (18.25) now? What are your thoughts? thank you!

    Comment by Cholo | June 15, 2010 | Reply

    • Cholo,

      I think it would be better if you pick up EDC(4.6), FGEN(10.25) or PNB(29). One the thing i’ve noticed in my trading in the past months is that buying fundamentally sound stocks with a good following in dips is more profitable than chasing them on high prices. But that’s just me 🙂

      Comment by JohnTheMan | June 15, 2010 | Reply

      • Hey John,
        That is not a bad observation. that is the way of the seasoned investor.

        Comment by Gus Cosio | June 15, 2010

    • Cholo,
      I think AP and DGTL have some more room to go after some consolidation. In the near term, both AP and DGTL could dip on profit taking. Personally, I do not hink DGTL is a good long term hold. I would treat it as an opportunistic trade, i.e. trade it while the interest for trading is there and get out when you’ve made a profit. You do not have to squeeze everything for this stock because people have been badly burned in DGTL in the past.

      Comment by Gus Cosio | June 15, 2010 | Reply

  13. sir gus,

    whats happening to edc?
    for mpi, i noticed big brokers such as 203,220,323 are disposing alot… what do you think is their strategy? does the north harbor nego has something to do with this?

    for pnb i dont have any worries..

    thanks sir.

    Comment by draco23 | June 15, 2010 | Reply

    • draco23,

      We have the same concerns with MPI. This is the only trading stock in my portfolio. It would be great to hear from you sir Gus.

      Comment by JohnTheMan | June 15, 2010 | Reply

      • John,
        MPI is well inside the 2.65 – 3.25 range. Hold your nerves guys. If you have cash and like the market, averaging down may reap a good harvest.

        Comment by Gus Cosio | June 15, 2010

    • Hi,

      I read in a filing that MPI targets P3B 2010 earnings. That translates to 2010 PE of less than 19. Even if MPI maybe an infrastructure company, such is not cheap.

      Investors may have a tendency if they want to lessen stock holdings to sell those with high PE ahead.

      Thanks

      Comment by alex | June 15, 2010 | Reply

    • Draco,
      I’m willing to play chicken lane with EDC because I see nothing wrong with it. If there are sellers, they have reasons of their own which I have no idea of. The downside that analysts see in EDC is the drag in earnings from the acquisition of the Bac-Man generating facility, but that is already in the price. If it is a matter of nerves, I’m willing to hold mine with EDC for the time being. As for MPI, I do nt see any sign that it will move out of the range. At 2.75, it is well inside the range.

      Comment by Gus Cosio | June 15, 2010 | Reply

      • In general Sir Gus, when is it wise to play chicken and when is it not? Put another way, when do you say that the “collective wisdom” of the market wrong and stick to ones beliefs?

        The reason I ask is because I often get confused applying money management rules (e.g. stop loss), reading charts (e.g. support/resistance), and incorporating lessons such as “never fight the tape”.

        As always, thank you Sir Gus.

        Comment by jitka | June 16, 2010

      • Jitka,
        Remember that in stocks, price movements reflect both the fundamental value of a stock and the market’s sentiment on it. If I believe in the fundamental value of a stock, selling sentiment will not bother me so much if there is no information that contradict my fundamental valuation. when There is a big move on a stock my knee-jerk response is always to find out what is going on in the stock. If there is nothing but simply selling, then I’ll wait for the selling to stop then look to buy. That is what I mean by playing chicken lane or a game of nerves. Not fighting the tape is similar; you don’t buy when there is heavy selling. You wait patiently until things stabilize.
        Money management comes in in times of cutting loss, averaging down or pyramiding up.

        Comment by Gus Cosio | June 16, 2010

  14. Hi Sir,

    I have already invested heavily on promising stocks such as PNB and EDC. Despite their potential for returns, I have decided to focus now on steady sources of income to diversify my portfolio. Is it a good move to invest on preferred shares such as Petron and Ayala? Rates here are around 8-9.5%. I intend to hold these till maturity. I am just a little hesitant purchasing them at a premium. (Petron is at 104 and Ayala B is at 106). Are these a little bit safer than stocks yet better than regular TD’s?

    Thanks!

    Comment by Benjie | June 15, 2010 | Reply

    • Benjie,
      Preferred shares have no maturity. They have a call date which is the option of the issuer to buy back the shares.The risk is just below equity since they are part of shareholder capital. What you should do is use a bond calculator like HP12C to compute the value of the share to its call date given the price in the market. The preferred market has lower liquidity that common stocks.

      Comment by Gus Cosio | June 16, 2010 | Reply

  15. Hi Tito Gus, Many Bluechip stocks are moving sideway now like pldt,AC,AEv,Ap,Glo,Pnb,mpi,dmci and also most property stocks like meg,RLC and filinvest. Could this be the start of the distribution phase?

    Comment by mitch | June 16, 2010 | Reply


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