Gus Cosio says so

Ideas on the Philippine Stock Market

A cautious bull

I was going to write something inspired by this heading, but I could not find the time last Friday due to a series meetings both in and out my office.  I also had to catch up with a professional men’s retreat somewhere in Laguna.  I am finally going to sleep in my own bed after being away for almost a week.

There is good reason to be cautious because the market has gone way past most expectation.  When you come down to why this happened, it is really because many who did not think that stock prices would go this high had come to chase the market.  The question in many people’s minds is whether this trend is over.

If you go back to how stock prices and market rends behave in this market, what had actually ended bull markets were external and fundamental factors.  Let us take the decline in 1997 to 1998, that happened because the Asian financial crisis made local stock prices too expensive and money went away.  The decline from 1999 to 2003 was initially triggered by capital flight from the Estrada administration.  Investors just did not believe that our economy could go anywhere with Estrada at the helm.  Unfortunately, the dot-com bust of 2001 and the 9-11 tragedy brought about a recession in the U.S.  In 2007, what brought our market down was the start of the U.S. recession which officially had set in on the fourth quarter of 2007.  Of course, 2008 saw the big global crash.

The question I ask myself now is what is going to make this market crash.  Otherwise, this bull will keep on raging.  Surely, there is nothing in the horizon that could reverse this trend.  The thing is everybody will be welcoming a correction which means if this market tanks, buyers will be stepping in at some point not far behind.

There have been questions on stocks such as RFM and SLI.  These stocks have been historically illiquid, but when the tide rises, the small boats rise with the big.  For me SLI is a no brainer already, but RFM may be worth looking at because of improving fundamentals.  I do not recommend it strongly, but I wouldn’t dissuade anyone who has firm conviction in the stock.  For MPI, I would trade the flow of the stock since it has not yet reached full potential.

Mining stocks may have some room to go because of this spectacular surge in LC and LCB.  I should have stuck it out with these stocks since I held it for quite a while believing that it has the largest mineral resource in the country.  Unfortunately, I got impatient and sold too soon.  Lesson learned? When you are convinced about your information, try to stick it out.  That is why I think I’ll stick it out with ORE.  I went to so much extent finding out if they are producing enough ore to ship, and my sources tell me that they will definitely be shipping.

I appreciate the debate about DGTL.  The differences in opinion is what is likely to propel this stock forward.  I remember when TMT (technology, media, telecom) was in fashion in NASDAQ in the 1990’s PE’s were in the 100’s and debt to equity ratios were stratospheric.  The condition of DGTL is no different today except rather than being a start-up story, it is a recovery story with a solid franchise and customer base.  A bet on DGTL today to my mind is better than a bet on GLO because their franchises are going the opposite direction.  They are cutting up the same pie, but this time around the bigger slice is with DGTL, momentum wise.

So I am bullish and I am holding on to some TEL, DGTL, DMC, SLI, PX, ORE and ALI.  I have a good cash balance though just in case a heavy consolidation comes.  Bulls are not characteristically careful, but I am not the four-legged kind anyway.

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September 24, 2010 - Posted by | Financial markets in Asia

57 Comments »

  1. HI Sir, is your post really blank or there’s a problem with my connection? Anyway.. I recently bought LC at 0.64 and PX at 16.20 (I think both at their highs for the day haha), Im not really familiar with the mining sector and am just merely riding the news on the 2 stocks. What do you think about my choices?
    By the way. Thanks for DGTL! bought it around 1.46 when you mentioned it.

    Comment by Cholo | September 24, 2010 | Reply

    • yes same observation here……..o sadyang sabihin sa atin that market is overheating and we have to be cautious?

      Comment by mike | September 25, 2010 | Reply

  2. Thank you for DGTL! I bought it @ 1.48 and will hold until the end of this year.

    Comment by loco | September 24, 2010 | Reply

  3. I kept waiting for the rest of the entry to appear. Only to realize too late its not coming is it? hehe..

    Oh, about DGTL – its in the Philippine Star today. It seems that they have broken the 1M postpaid subscriber count. i.e. They can now claim to have the most postpaid subscribers. The comparative numbers are DGTL 1M, GLO 950K, SMART 450K postpaid.

    It seems that DGTL has now 16M subscribers in total..

    And I just bought another round of it yesterday.. Good thing too as it seems that it made a big move today :jumpingforjoy:

    Thanks Mr Gus!!

    Comment by jasper | September 24, 2010 | Reply

    • After announcing it is now leading in postpaid subscription compared to Globe and Smart, but ATR estimates its revenue per user was low at 75/mo, compared to GLo’s P171/mo and Smart’s P160/mo.

      Comment by Foreign Investor | September 24, 2010 | Reply

      • Naturally, that is true, thinking that their plans are so much cheaper compared to the other two.

        Comment by deuts | September 24, 2010

      • Yes, but at that volume they are competitive. For example, DGTL at 1M postpaid subscribers at 75/mo is 75M/mo. This compares favorably to smarts 72M/mo (450k*160)

        I think, a this point DGTL being a successful turnaround isn’t in doubt anymore. Previously I have held off in buying more and is waiting for the next quarters result but that might not even be needed anymore.

        DGTL the company is gaining steady income. The stock should reflect that value (But when and how high, I have no idea).

        Comment by jasper | September 24, 2010

      • How were they able to come up with the 75/mo usage per month when the lowest plan for post paid is 350/month? Isn’t it if it’s post paid, you pay for it irregardless whether you consume it or not? Am just wondering about that figure.

        Comment by Kerwin | September 26, 2010

    • DGTL is highly leveraged…

      -Debt to equity ratio using only long term debts is about 8, GLO has 1.7 and TEL has 1.8 using TOTAL Liabilities…

      -DGTL has long term debts with about 5.6% interest on average. Their operating profit margin is only around 7% in 2009… In 1st half 2010, they reported 1.8% net profit margin… Arguably, that means shareholders only get less than 2%, the rest goes to the bank and taxes.

      -They even issued zero-coupon bonds back in 2003, with an issuing price of US$10 mil and face value of US$31 mil (about P1.4 billion), all of which are owned by JGS, maturing in 2013… To my understanding, at the year 2013, DGTL is going to pay its bondholder the lump sum of P1.4 billion…

      Question: Will DGTL’s earnings be able to catch up to this P1.4 Billion maturity? with extra for its shareholders?

      Reported 1st half of 2010 earnings is around P145mil, could be P300mil by year end… 2011 maybe P600mil, speculating it will double… 2012 maybe it will double again P1.2bil…

      Too speculative… especially with the high leverage…

      Comment by Rudy | September 24, 2010 | Reply

      • Hi Rudy,

        I suppose the leverage came from several years of losses while the critical mass, subscriber base and cell sites are being developed. My simple thinking is this, if it was able to sustain with the losses the past 6 years, will it be able to refinance now? Can it for example convince a bank that going forward it can turn in positive cash flows?

        The only advantage I saw with the post paid even if its low at P350 is that it is sure for the next 24 months due to lock up.

        Thanks

        Comment by alex | September 25, 2010

      • Hi Alex,

        Yeah, the same question goes through my mind.
        With the pressure of its interest bearing loans eating up their profits, its a bit hard for me to be optismistic… It only takes a catalyst of bad events for its earnings to go below those interest payments, and that’s not gonna be good…

        Banks will probably still finance them with loans, of course its good business for the banks considering that the telco industry does provide stable cash flows, but what about the minor shareholders like us… like i posted before, the bank owns more of DGTL than the shareholders by 8:1, and of course banks get paid first before shareholders…

        With the current bull run and the good news it just reported about its 1M subscribers, maybe for the short term stock prices will rise, but it has to be backed by facts and fundamentals… We wouldn’t want to invest our hard earned money on “psychology” now would we?..

        I guess it all comes down to investors comfort level… If they can lower their exposure to those debts with their growing earnings then maybe I’ll be more comfortable with it and take a 2nd look…

        Comment by Rudy | September 25, 2010

      • JGS owning debt papers on DGTL is not a problem. It would be a problem if it was some bank who would pull their investment once problem arises, bug JGS is the parent company. Mr Gokongwei has been very patiently nursing DGTL to health. Will he now pull down his own company (DGTL) just so his other company (JGS) will earn a few more bucks? And now that its reached critical mass too? I highly doubt that..

        But I agree that its still speculative at this point. That’s why I have limited my exposure..

        However, turnarounds when they turn, can give very big returns. It its the land of the ten-baggers according to Peter Lynch. So the question now is, going forward, will it turnaround or will it sink into oblivion?

        In a year or two, we will know the answer

        Comment by jasper | September 25, 2010

      • I’m with Rudy on this one. DGTL has a good business model but its assets are virtually equal to its liabilities. If DGTL can significantly strengthen its balance sheet in the future I would consider buying shares, but not at this time. Why force the issue when there are other more fundamentally sound companies out there?

        Comment by gp | September 26, 2010

      • Hi GP,

        Can you share what are those more fundamentally sound stocks? Thanks!

        Comment by Blogspot | September 26, 2010

      • Hi Blogspot,

        There are a lot of those. Valuations may be a little high at this point but still, their financial positions are way better when compared to DGTL. Highly leveraged companies have very little room for error. Take note though that this is from an FA point of view. If you are practicing TA, then it’s a completely different matter. Like they say, “the trend is your friend.”

        Comment by gp | September 27, 2010

  4. We must be cautious sir Gus Dollar is going down Peso is going to 42 by december not good for BPO’s and Export companies and also a BAD NEWS for our OFW…. i think only petron makes money when Dollar loses strength…

    Comment by Francis | September 24, 2010 | Reply

  5. Hello sir, I hope you’re having a great time in Cebu =).
    Any comments on LC? Got it as a punt at 0.62 during heavy trading and was hoping it would go up even just a bit, instead it finished at 0.57 with 2,566 trades. Is it still prudent to hold this or do I just take losses?

    By the way thank you for the insight regarding mpi, dgtl, px, I earned quite a sum on those. Maybe if I earn enough in this I may not have to leave the country anymore (I’m a stock trading nurse xD).

    Comment by Dennis | September 24, 2010 | Reply

  6. Sir Gus,

    What I can say is.. Wow thanks for your wonderful insights.You are a great help for us here…Regarding Dgtl with a little patience our seed now is growing.hahaha. SIr my question is should we buy more for this? And also thank you for PNB I did not sell it till now and hope that it will reach to 115 per share like what the other investors are discussing here. Do you think it can reach to that price? thanks.

    Comment by ronaldo | September 24, 2010 | Reply

    • Hi ronaldo, I’m actually still waiting for that price and am looking to acquire more on monday if it stays at the same price or goes lower.. Best of wishes to both of us.. This won’t be an easy ride, but let’s be patient..

      Comment by Jay gee | September 24, 2010 | Reply

    • Ronaldo,

      DGTL for me is definiteley a BUY!

      Comment by Blogspot | September 26, 2010 | Reply

  7. Sir Any insights also for AP is going down for a weeks now. I got 6.5% gain for it this time. Should I sell it Or should I need more patience for it?

    Comment by ronaldo | September 24, 2010 | Reply

    • Ronaldo,
      just be patient, I think you’ll be able to buy this below 20. alternatively, you could also look for an opportunity to buy AEV.

      Comment by Gus Cosio | September 27, 2010 | Reply

  8. Hello Sir Gus,

    I cannot see details of your post..it is blank.
    Anyway, any insights on SLI? It is still down today, what can you say about DGTL’s performance today? Thnaks hope to hear from you..

    Comment by Blogspot | September 24, 2010 | Reply

    • Blogspot,
      I still like SLI. I think it has more room on the upside.

      Comment by Gus Cosio | September 27, 2010 | Reply

  9. sir gus, what do you think of ore? what do you think is its value?

    thanks

    Comment by jolly | September 24, 2010 | Reply

    • Jolly,
      I think I’ll be trying my luck on ORE.

      Comment by Gus Cosio | September 27, 2010 | Reply

  10. san ka pa, kahit walang blog andaming comments… 🙂

    Comment by ramon | September 24, 2010 | Reply

  11. Sir gus,

    What do you think of MPI? Metro Pac Tollways has decided to increase its capital stock once again. Won’t this dilute ownership?

    Thanks

    Comment by Pinoy Na Bigbrother | September 25, 2010 | Reply

    • Bigbrother,
      I think MPI is just getting better fundamentally.

      Comment by Gus Cosio | September 27, 2010 | Reply

  12. Hello Gus!

    Thanks for your suggestions.
    What’s your take on SLI and RFM?
    SLI – in the current prices which do you think is better to invest in properties SMDC or SLI?
    RFM – their portfolio in food sector is almost the same with URC however shares are very cheap, do you think there is a long way to come on this stock?

    Regards,

    Comment by Taylor | September 26, 2010 | Reply

  13. It’s great to know that the Philippine stocks market bull keeps on raging. Sana laging ganyan at hindi matinag.

    Comment by Girlie Labastilla | September 26, 2010 | Reply

  14. Hi sir,

    While I was driving around the city early this morning, I noticed that there are lots and lots of lands being cleared out for condominium development. Along libis there are around 3 raw lands leveled and around the Shang area, also quite a number such as the former LTO area which ortigas bought and would soon give way to more condos. In your opinion, isnt this too much? Are there really that many people in need of these? If no then maybe we are next in line for the housing bust dont you think? Maybe 3-4 years ago, owning one to put up for rent would be a good investment but now im thinking otherwise.. Moreover, imagine the traffic 5-10 years from now… hayayay..

    Comment by Ria | September 26, 2010 | Reply

    • Ria,
      A lot of the wealthy people in the provinces are buying up these condos. Then they rent them out. That’s because interest on deposits are so low, rental income becomes attractive.

      Comment by Gus Cosio | September 26, 2010 | Reply

    • Hi Ria,

      I share your views. In the Makati CBD alone, there are at least 7 condo developments that I can think of and I’m sure there are more. And we’re not even counting the number of towers for each development. It makes one wonder how much more the market can take before a bubble develops, or is there one already waiting to burst?

      Comment by gp | September 27, 2010 | Reply

    • I agree with your observations, Ria. That’s exactly my sentiment regarding the mushrooming condominium projects. Will the condominium market suffer the same fate as the capiz, shawarma, powdered shakes businesses that everyone copied until the market became so saturated? I know that the capitalization for a condominium project cannot be compared to the businesses that I mentioned, however, the number of projects appearing everywhere is just scary to a point. In vicinity of new manila alone – there are at least six high rise condominiums being constructed, and those were the multi-tower ones. When everything is completed, at least fifteen high rise towers are expected to dominate the that small community. That’s saturation, plain and simple.

      Comment by Lux | September 27, 2010 | Reply

      • Lux,
        The fundamentals in the property market are much deeper that the number of condominiums you see coming up. People who have a lot of cash buy condos because they can generate rental income. If you as brokers, the rental market for the Php15,000 to 20,000 is very strong. This is where the bulk of the supply is being built. at 15K a month, that is 180,000 a year. The condo could cost 3 million. The rental yield is 6%, much better than 5 year bonds. Then there is the potential appreciation when supply settles down. I do not think that a bubble is here yet.

        Comment by Gus Cosio | September 27, 2010

      • Well I hope that the demand for rent would still be strong after these projects are finished. And imagine the number of people that would move into the city… its gonna be jam packed. I guess value for house and lot would rise. My parents already told me to invest in townhouses rather than condos which I also quite agree…

        Comment by Ria | September 27, 2010

  15. I have read somewhere else that..

    Next week is the quarter day, September 30, so expect foreign brokers to get rid of their losers and buy up their winners so that they can present a good performance to their superiors.

    Do fund managers really dump their losers instead of pushing them up?

    Thanks.

    Comment by oliver mia | September 26, 2010 | Reply

    • Oliver,
      This idea is a myth. Fund managers rebalance portfolios from time to time. It is the brokers who dump stocks.

      Comment by Gus Cosio | September 26, 2010 | Reply

  16. Hi sir,

    I am just a little worried about the price action of gold (and other precious metals) in the world market. Gold as we know is making new high, while at the same time, stocks related to gold production is also doing the same.

    Traditonally, gold is being used by most investors as hedge against inflation. Does this mean that the threat of inflation is becomming a reality? (specially when we consider the move of most central banks to “provide” more “money” during the height of US credit crisis?)

    In opinion, there was no similar incident in the past where “tremendous” amount of “money” was pumped during recession (Great Depression happened because they cant create money at the time; and i think same goes for Asian Financial Crisis).

    Economy is starting to recover, but unlike before, we have a tremendous amount of money that was put in the system prior to its recovery. Could this trigger a faster-than-expected rise in inflation when the economy start to roll? Could this be a reason why there is a sudden surge for gold?

    Just thinking outloud =)

    Comment by Raymond | September 26, 2010 | Reply

    • Raymond,
      Indeed the rise in the price of gold signals some inflation concern since many investors view gold as a store of value. Remember, however, that gold is also a commodity which has both industrial and commercial uses. The supply of gold normally follows this commercial and industrial demand for the commodity. Gold has been driven up by both speculative and commercial demand for the commodity which happens to be in short supply as of the moment because many central banks increased their holding of gold because of low interest rates, a weak dollar and underlying uncertainties in other currencies. Inflation, as I know it, is caused by the price of the economy’s scarcest resource which I believe to be oil (for the global economy) and not gold. The economy can do with very little gold but will have a tough time with very little oil. I think oil is the better harbinger of inflation rather than gold.

      Comment by Gus Cosio | September 27, 2010 | Reply

  17. Cheers to the two-legged bulls!!! Mabuhay tayong lahat 🙂

    Comment by MJL | September 27, 2010 | Reply

  18. sir gus, i would like to thank you for sharing your insights with us. Since I started following your blog, my stock picks have given me rewards many times over than expected, – the most rewarding of all is PNB, of course.

    I loaded up on DGTL when it was still doing P1.45-P1.50, upon your recommendation and look at it now. I believe in this stock and its fundamentals will surely support the continued rise in its price.

    Comment by Lux | September 27, 2010 | Reply

  19. You never really know how the market will behave. I bought EDC thinking it might go up to 5.5x and now its even better than that. Nakakatuwa sya. However, the stocks I thought would lead me to riches didn’t pan out.. Very fine line between skill and luck indeed.

    And while we are on EDC, I remember some other guy who bought at 4.65 and wanted to sell after a week to ‘cut down his loses’ (Kasi EDC tanked to 4.4). Thats a lesson for me regarding patience. Money doest grown on trees talaga. Sometimes you have to wait patiently.

    Comment by jasper | September 27, 2010 | Reply

  20. Hi Sir Gus,

    What are your insights in LC/LCB? I have recently purchased but today, Sept 27, despite the surge in stock prices, the 2 have been falling behind. Every cent dropped is burning a very big hole in my pocket. Thank you!

    Comment by Doctor Mundo | September 27, 2010 | Reply

    • Doc,
      I try never to chase prices especially if they happen in special situations. LC/LCB based on my research holds the largest mineral reserves among all local companies. The problem was that the stock price went up to high too fast. I really do not know where the real value is.

      Comment by Gus Cosio | September 27, 2010 | Reply

  21. Regarding SLI, I live in Antipolo and before that in SSS Marikina since the 80’s and I managed to follow Sta Lucia because of the Sta Lu mall in tropical Cainta.

    The Pros:
    Sta Lucia has a very big land bank going to Antipolo. In fact, you can drive all the way up to the mountains going to teresa and see an SLI subdivision there methinks.

    The Cons:
    Sta Lucia mall was the only mall before in that side of town. So all the people of cainta-taytay-marikina-antipolo will go there. I know. When I was in high-school there is only one hang-out place to be.

    But what happened since then? Now there’s a Robinsons besides them and one in Junction. An SM in Taytay, in Marikina and soon in Masinag. And Sta lucia still has one and only one mall. Sure they’ve expanded it thrice, but why couldn’t they build in some other location? They could have killed the SM in Masinag and the Robinson in junction buy building there. The had first move advantage after all.

    What I’m driving at, with this long winded explanation is that they’ve squandered away such big opportunities (Imagine what they could have done with the money they spent on PBA) that when I was looking for a property stock it was hard for me to consider them.

    But well, maybe they’ve changed and its better this time.

    Comment by jasper | September 27, 2010 | Reply

    • Jasper,
      It is really a gamble buying something like SLI. But because the market is forward looking, what would matter is how SLI would go from here.

      Comment by Gus Cosio | September 27, 2010 | Reply

  22. Sir Gus,

    As usual I find your blog very helpful in my stock transactions, not to mention your easy to understand response to the queries posed to you. They are indeed gems of information guiding us in this dangerous (depends on how one views it) but very desirable market.

    Comment by Nel | September 27, 2010 | Reply

  23. The point is, ladies and gentleman, that greed — for lack of a better word — is good.

    Greed is right.

    Greed works.

    Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

    Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind.

    Comment by Gordon Gekko | September 27, 2010 | Reply

    • Gordon, Have you watched the latest movie?

      Comment by Foreign Investor | September 27, 2010 | Reply

      • Not yet, It’s gona be showing this week. Its should be interesting =) Though I hope they simultaneously show it here in Cebu and not delayed =S I want to watch it. Have you seen it Foreign Investor?

        Comment by Gordon Gekko | September 27, 2010

      • No not yet, Im also here in the Phils. Would be watching this week. Enjoy

        “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett

        Comment by Foreign Investor | September 27, 2010

    • Gordon,
      Markets are often driven by greed, especially bull markets. That is what makes me even more bullish, there are not enough greedy people around yet. Everybody is still a skeptic, i.e. a fearful investor.

      Comment by Gus Cosio | September 27, 2010 | Reply

      • I totally agree, Gus! Please watch my new movie coming out this week, WALLSTREET: MONEY NEVER SLEEPS! They sure took a long time to make a sequel of the 1987 hit of which I got arrested in the end!

        on another matter, I want you to get my sincerest THANK YOU for making your blog, answering my noobish inquiries and helping me more than double my money in the stock market. Now, I’m aiming for seven digits 😉 Greed is Good! … when kept in check.

        Comment by Gordon Gekko | September 27, 2010

  24. Hi Gus,

    Whats with Sli that you see?….are their business environment improving?……forthcoming take over? expansions?
    hope you can enlighten me more on this stock

    Comment by mike | September 28, 2010 | Reply

  25. sir gus, what is your target price for dmc?

    Comment by jolly | September 29, 2010 | Reply


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