Gus Cosio says so

Ideas on the Philippine Stock Market

Who’s afraid of the hungry ghost?

10:15 am  Wednesday   11 August 2010   Philippine Stock Exchange Index  –  3,532.62

A few things have been putting a damper in the market over th past few weeks.  In spite of strong earnings reports among PSE listed companies, very few stocks have really moved far higher than they should have.  The main stumbling block has been the fears arising from deteriorating economic conditions in the U.S. reflected by very little improvement in job creation.  This has prompted the U.S. FED chairman to signal further easing in policy.  Overnight, we saw most markets fall into the red in Asia, Europe and North America.  In Asia, the culprit appears to be the onset of the “hungry ghost month.”  Chinese astrological beliefs explain that this time of the year, the spirits of those that had gone to the other world return earth because they are hungry.  With all these spirits running around, many mischiefs can result and a multitude of things could go wrong.  That is why people become very cautious particularly with money matters.  In places like Hong Kong and Singapore.  It is not unusual to see people burning play money and incense while offering fruits to images of their relatives in order to appease the emotions of ghosts that are running around.

What this does to the market is it reduces liquidity and whatever liquidity premium that is attached to favored stocks disappear.  Those that have low liquidity value deteriorates further because of lack of attention.  The decline in trading volume is further exacerbated by the peak of the summer holiday season among western hemisphere fund managers.  All these concerns accumulate into one seemingly bearish tone in most markets.

Should we be bearish in this market?  Well, I’ve always believed that the trend is your friend.  The short-term trend appears to be turning bearish, so I believe that I will ride that trend.  That is not to say that I will wind down all my positions.  That would be too risky.  What I’ve been doing is top-slicing on my positions, i.e. selling to take some profits and raising my cash position without being flat or zero position in the stocks I like.  Again, it is simply managing my cash and preserving some profits.

The stocks that I am happy to keep are DMC, PNB, MPI, EDC and TEL.  Although EDC has not been performing, I learned that producers of renewable energy have priority in selling into WESM which is the most profitable space in the power generation market.  I believe the same is true for FGEN.  These stocks including FPH have been quite weak lately, but I think that is happening because portfolios are switching our of these stocks and moving to LPZ.  LPZ is the ultimate holding company of all these and the sum of the parts in LPZ has been way below the price of ultimate parent.  This is a classic arbitrage move, a valuation adjustment that ought to happen in the market whenever valuation gaps go very wide.

My strategy is to keep my winning positions because the long-term trend is still headed north.  That is not pure sentiment on my part.  If one takes a close look at individual stocks, earnings are pretty strong and look to have sustained prospects due to a strong underlying economy.  From a global point of view, I believe that global money continues to flow to emerging markets Asia.  It will eventually flow at a faster rate into the PSE.  I would use this ghost month to my advantage and try to accumulate large cap stock when they go weaker.  After all, with the FED easing monetary policy further, all that liquidity will seek out the cheaper markets and ours is certainly inexpensive given present and forward earnings of Philippine listed companies.

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

45 Comments »

  1. I’m Chinese so I mean no disrespect to these traditions, but 8 (August) may also be seen as a lucky number and for the past few years, 3rd quarter has been quite a trading quarter. I think its only towards the end of the quarter that things turn bearish. I guess a lot of money is in the sidelines right before the Ghost Month, and they can’t resist but join the party when certain stocks come up.

    Comment by Warren | August 11, 2010 | Reply

    • Hopefully that comes true pal. But mostly all local investors large and small once, react based on the U.S markets since they are really weak and most of these Large investors have sidelined abroad. But it would really be better to accumulate when they go weaker and still have some position in the market

      Comment by Foreign Investor | August 11, 2010 | Reply

      • I agree with you. What I mean is that before these foreign fund managers go on vacation, they usually liquidate. SO most of the sellers have already sold by the start of the ghost month, leading to a short rally. Once this wears of though, the lack of liquidity tends to drive prices a little lower.

        Good luck!

        Comment by Warren | August 12, 2010

  2. Sir,
    At present I only have PNB with paper profit of 40%. Just like you I chose to hold this stock until it reaches full potential. However, I still have 50% cash just waiting to be placed. My choices are MPI, DMC, EDC LPZ, AP, FGEN. At current prices and potential upsides or correction, can you suggest to me what would be my priorities in buying.
    thanks

    Comment by Mark | August 11, 2010 | Reply

    • Mark,
      I would choose MPI, DMC, AP, EDC and consider DGTL. It is not advisable to own FGEN and EDC together because FGEN already owns around 60% of EDC and EDC is the strongest driver of FGEN’s growth.

      Comment by Gus Cosio | August 11, 2010 | Reply

      • Thanks sir. Appreciate your inputs. By the way, LPZ seems not in your list while you briefly talked about it earlier. Any preservations on this stock?

        Comment by Mark | August 11, 2010

      • Mark,
        a few months ago, I thought LPZ (when it was still BPC) was cheap. I bought it at 3.45 but I sold it at 3.85 and lost track. Unfortunately, I could not access hard valuation on LPZ on my own because it was not widely researched. I stopped following it.

        Comment by Gus Cosio | August 11, 2010

  3. Gus,

    What can you say about AP’s price? Is this just a normal correction or is something going on that triggered the sell-down? Thanks.

    Comment by Keith | August 11, 2010 | Reply

    • Profit taking triggered the selling. Remember, this stock was 3.30 17 or 18 months ago. People have six time their money. That is why they are protecting their profits.

      Comment by Gus Cosio | August 11, 2010 | Reply

      • Gus,

        I have positions on AP and AEV. Would it be good to sell or just hold ? Is the over all trend going down for these two? I was surprised of the selling despite AP getting a huge increase in profit for the 2Q. Thanks!

        Comment by raymund | August 11, 2010

      • Raymund,
        Taking some profits for cash management is always advisable. This allows you to reallocate to stocks which you may look favorably on.

        Comment by Gus Cosio | August 12, 2010

  4. Hi Sir Gus,
    Media stocks ABS & GMA7 has been rising significantly within the past few days despite the negative global sentiment on global media stocks worldwide recently. Any idea sir on what is causing this?
    Thanks.

    Comment by Sasuke | August 11, 2010 | Reply

  5. Sir Gus,

    I agree with you that LPZ is still cheap compared to its share in FPH and ABS only. LPZ movement can be attributable to the ABS price increase due to buyback/record earnings and the sentiment of FPH and FGEN which underperformed the market. FGEN’s total market value is only equal to its 40% share in EDC. Sum of the parts of LPZ is still cheap as a holding company.

    I can also live with the TEL dividends which is a long term play for its dividend as its days as a growth company is already over.

    Comment by alexis | August 11, 2010 | Reply

    • How cheap is LPZ?

      Comment by Mark | August 11, 2010 | Reply

      • Very Cheap…going to 7 then 11..

        Comment by jenny | August 11, 2010

      • Hi Jenny,

        Would you mind sharing with us your ideas on why LPZ is going towards 11? What do you think is the timeline?

        Thank you.

        Comment by alex | August 11, 2010

  6. Hi Sir Gus!

    Almost all popular stocks are up today (DMC, MPI, PNB even EDC), except for AP. I really like this stock and know that it will be good to hold for the long term. But do you think its a good time to buy now at around 19-19.20? Or do you see further correction?

    Thank you!

    Comment by cholo | August 11, 2010 | Reply

    • Cholo,
      accumulating a stock means buying it in portion when it is not moving higher. I would accumulate AP at these levels and hopefully lower.

      Comment by Gus Cosio | August 11, 2010 | Reply

  7. Sir Gus,

    Any thoughts on DGTL? It was “green” in the early part of the trading but it cloed negative. Thanks Sir!

    Comment by KennyV | August 11, 2010 | Reply

    • With regards to DGTL, I think it is healthy that green on low volume closed to red latter to give those going out of the stock the chance to do so.

      Thanks

      Comment by alex | August 11, 2010 | Reply

      • I agree with Alex, noting that there are diverse set of new players going in since late last week and only UBS (333) is actually selling, i am optimistic that this stock is now in critical state and is now ripe to fly anytime. I expect (and hope) volume will move up strongly in the next two days (close to 100 M tom or Fri) with price/share moving closer to 1.5. If this happens, many DGTL holders will be happy next week.

        Comment by Chris M. | August 11, 2010

    • Be patient, Kenny. DGTL will be higher as soon as the current wave of selling is over. You cannot keep a good stock down especially after it has been traded heavily.

      Comment by Gus Cosio | August 11, 2010 | Reply

      • Thanks Sir Gus, alex and Chris M.!

        Comment by KennyV | August 11, 2010

      • So its not too late to buy at 1.45?

        Comment by Jude | August 11, 2010

  8. also any thoughts on MEG at 1.78? thanks!

    Comment by cholo | August 11, 2010 | Reply

    • Cholo,
      MEG is a stock that is traded heavily by Technical traders. It may be running out of steam.

      Comment by Gus Cosio | August 11, 2010 | Reply

      • Sir Gus,

        Meg may have the track record in the development of real estate but its concentration in say Fort Bonifacio and Metro Mnl maybe a cause for caution? It has limited going development in the provinces.Ali for instance use to have limited provincial presence but is currently doing so.

        Thanks

        Comment by alex | August 12, 2010

      • Alex,
        for some reason which our analysts are verifying, our find managers are favoring VLL over MEG. As I mentioned in the past, I believe that MEG is more of a trading stock rather than one which you can keep as core investment. In short, MEG trades in momentum then traders try to get out all at the same time. That is why it is so volatile. In my opinion, a good property issue for core portfolio is RLC. VLL is one which may have good propsects as a stock that has not yet reached fair value.

        Comment by Gus Cosio | August 12, 2010

  9. Sir Gus, what is your take on AP at this point? Would it be sound to hold it until the end of the year?

    Comment by miku | August 11, 2010 | Reply

    • Miku,
      If you own AP at these levels, it is still alright. This is a Phenomenal stock.

      Comment by Gus Cosio | August 11, 2010 | Reply

  10. Sir,
    what is your take with DMC? Do you think it deserves to take a rest for now?

    Comment by CM | August 11, 2010 | Reply

    • CM,
      I hear DMC is doing some corporate reorganization of it subsidiaries with the effect of bring back more earnings to the parent. I have the good fortune of some buying DMC when it was below 10, then again when it was below 15. I never sold the stock because I thought it was worth more than 25. It may be taking a rest now but I am not compelled to sell because I do not know whether or not I can buy it at a lower price. Because I like the stock anyway, I would rather hold it. If it goes down below 20, I’ll probably buy my third tranche.

      Comment by Gus Cosio | August 11, 2010 | Reply

      • Thanks Sir. I actually missed the boat when it was 18.90++ a few days ago. I remember what you said that DMC on the 18’s is a good buy.

        Comment by CM | August 11, 2010

  11. Sir Gus and Gentlemen:

    Im thinking that our country have strong consumers despite of the bit high unemployment rate due to the increasing remitance of our OFW countrymen?

    Hence for the next few months as funds are being redirected from defensive and value stocks to growth stocks, consumer oriented stocks may slowly get the focus of investors?

    Thanks

    Comment by alex | August 11, 2010 | Reply

  12. Hi Sir,

    Do you know the schedule release of DGTL’s Q2 report. I read/heard it’s really good. Maybe that’s the push this stock’s been waiting for so long.

    Comment by herecomesthebaby | August 11, 2010 | Reply

    • Hi,

      Dgtl 2nd qtr to release Aug 14 or Aug 16 monday. Improvement in its earnings will be a plus factor for JGS I suppose.

      thanks

      Comment by alex | August 11, 2010 | Reply

  13. LPZ is the Ultimate holding company…..thanks for your very kind words Sir Gus…LPZ….7-11

    Comment by out-smart-investor | August 11, 2010 | Reply

    • what I mean is that it is the final holding company of FPH, ABS, FGEN, and EDC.

      Comment by Gus Cosio | August 12, 2010 | Reply

  14. Hi Sir Gus, Is it Okay to invest in Dollar Bonds? or invest in Dollars or euro…

    Comment by jay | August 11, 2010 | Reply

  15. Hi sir Gus. FDC bought about half billion FLI shares from its affiliate FAI. What would be the underlying reason for this “left pocket to right pocket” move? Your insights are valued as always.

    Comment by jojo | August 11, 2010 | Reply

    • Jojo,
      what that does is it raises consolidated earning in the FDC level, i.e. more of earnings per share of FLI will flow to FDC making it more attractive.

      Comment by Gus Cosio | August 12, 2010 | Reply

  16. @gus
    I have in my hand an analysis of AP way back in January. It’s price was 9p. Talk about the gigantic moves I missed. Anyway, the price is now 20, and yet there is still this optimism about the stock. Is it still below its fair value? Or is the optimism tied to its extremely good earnings potential

    @gp
    I just took some accounting for non-accountants course. I forgot where but courses such as this are everywhere. Then I printed out investopedia’s tutorial. here: http://www.investopedia.com/university/ratios/

    (btw:If you want to reach me. My email is jrebong0 @ gmail . com <- just remove the spaces.)

    But right now – i am really trying to understand Mr Gus. More than his recommendations, I'm more attracted to how and why he values his stocks. – I think I can learn a lot from his cues. He is a practicing investor here in the Philippines so thats a big plus too.

    So Gus, pls keep the hits coming 🙂

    Comment by jasper | August 11, 2010 | Reply

    • Jasper,
      If you download AP’s first half disclosure and try to project earnings forward, you will realize that this is still a cheap stock at 19. I am, however, of the belief that it could consolidate some more closer to 18 in the current month for seasonality reasons.

      Comment by Gus Cosio | August 12, 2010 | Reply

      • when we say ‘project earnings forwards’ do you use a DCF?

        Comment by jrebong | August 12, 2010

  17. LPZ The Ultimate (cheapest) Holding Stock……The next aev

    Comment by jay | August 12, 2010 | Reply


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