Gus Cosio says so

Ideas on the Philippine Stock Market

Time to enlarge your cap

9:25 am Thursday  28 October 2010

Two things were noteworthy in yesterday’s market run – the spike of MBT to 79.40 and and the surge of SMC to 92.  Of course, MBT had the stronger close (up 4.62 but very close to the high) while SMC had the bigger gain (12.36 but the close was 3.80 lower).  When a price action of this magnitude, there must be something going on.  With MBT, the price was driven down because of a surprise rights offering.  What the move yesterday tells me is that investors are looking beyond the disclosed earnings estimates.  It could also be that 3Q2010 earnings have exceeded expectations and/or the rights offering will be priced higher than expected.  Nevertheless, it all points out to a potential re-rating of MBT.

The move of SMC comes as a very big surprise because over the past few years, SMC had been a neglected stock because investors could not understand what the core business of SMC was given all the re-structuring it had done and its entry into the power, infrastructure and even the telecom businesses.  Quite ominously, about a month ago, an analyst friend of mine named Eric had told me that he was accumulating SMC.  He did not give me any reason except that he thought that compared to the rest of the large cap universe, SMC was becoming undervalued.

What would am I trying to say?  Both SMC and MBT are among the most largely capitalized stocks in the market.  It is very difficult to move these stocks unless big money is flowing into them.  They may have skewed the index a bit yesterday but the signal that I am seeing is that there will be further surges into the large cap in the coming days.

The stocks to watch therefore would be AC, TEL, ALI, AEV, JGS, BDO, BPI, SM, MER, SMPH, EDC and URC.  These are largest caps in the index and there should be some repositioning going on from among the institutional funds.  There will also be a realigning of the index which was recomposed yesterday.  GMA7 is out while DMC is in.  We should keep an eye on DMC as well because this is probably the most promising stock in the market.  SECB is out replaced by JGS.  I have been watching JGS throughout the Cebu Pacific IPO saga, it has performed wonders but has recently been sold down.  I think together CEB, JGS will soar to new heights in the next few days.

Then, of course, there is PX which reported excellent  3Q2010 income of Php 1.1 billion, surpassing the Php 983.9 million for the entire first half of 2010.  For technicians, PX looks to be ready to fly in the charts.

There was a comment from a reader that mining could be the next bubble.  I think everybody is entitled to his own opinion, but an opinion that is based on pure guess-work is not as reliable as analysis based on present and reasonably assumed future figures.  Perhaps metals prices may not continue to move higher.  Take note, however, that production costs of mining companies in the Philippines (Lepanto excluded) are way below spot and futures prices.  For as long as this margin does not close up, I think that if there is indeed a bubble, it is not has not yet been inflated.

October 28, 2010 Posted by | Financial markets in Asia | 65 Comments

Breathing in the sky and in the center of the earth

6:00 pm  Tuesday 26 October 2010

This week will be a short one and so will next week be due to All Saints Day on November 1.  Nevertheless, this week looks to be a most promising one.  Today, in spite of a strong opening, sellers tried to beat up the market by selling into its strength.  But lo and behold, when the market had gone lower, buyers of strong stocks once again emerged.  People who are holding their breath for a deep correction are probably turning blue already.

The debut of CEB was quite well received, but skeptics continue to abound.  What I find unreasonable is that the doubts about CEB is not at all about the company and the favorable promise it holds.  The jaded view is that of Big John Gokongwei who many still believe does not leave anything on the table for investors.  I would not want to be an apologist for the real Big John, but one has only to look at the performance of Gokongwei stocks over the past year or so to gain insight on how high CEB can go.

Look at URC which was trading as low as 5 pesos in 1Q2009.  Today, it traded between 44 to 45.  That was about a 900% return on your investment for about one and a half years.  That is not bad in any language.  How about RLC which was trading below 4 about the same time last year.  It now trades around 17 or over 325% return.  Compare to ALI which returned below 185% for the period or SMPH which returned around 85%; all three are mall operators but RLC outpaced in stock price.

Even JGS, a holding company which was trading around 2.50 at the start of the period.  It is now trading between 24 and 25, roughly a 10 bagger.  How does that look against other holding companies?  Well AC went from below 200 to just above 400, at least a 2 bagger;  SM was doing just 200 and is now trading between 500 to 550, between being a 2 or 3 bagger.  DMC (my favorite) was, of course as robust if not more rewarding – an 11 bagger.  By the way, AEV was also an 11 bagger.

What is my point?  A lot of local brokers and traders may have a jaundiced view of Gokongwei companies, but the numbers do not bear them out.  A lot of money had been made trading Big John’s companies.  If you still hold the stubborn view that the guy is just going to stuff his investing public again, well think again.  It is only the fool that does not change his mind.

I do not want to sound like a preacher for CEB, but I think the stock will eventually be seen from a different perspective by local investors given that foreigners view the stock favorably.  I cannot help but recall Singapore Airlines and Cathay Pacific which are very closely followed stocks in their home markets, as well as Thai Airways in Bangkok.  These are headline stocks in their countries and the Philippines had so far been deprived of a good airline stock to trade.  CEB will surely have a role in Philippine portfolios whether foreign or local because it will reflect a critical mass of the domestic transport and logistics sector.  Surely, a well allocated portfolio will usually find room for CEB at one time or another.

So much for the sky.  Now we go down deep into the earth.  I see a lot of opportunities going into the core of the earth, i.e., minerals and mining.  I think there will be no stopping ORE for the time being as people will be looking for something to trade while waiting for Nickel Asia to list.  I suspect that PX will start seeing sympathy buying as AT marches toward the 20 peso level.  Gold and copper may be taking a breather together with the broad commodities market, but once people catch their breath, they will be running with a lot of second wind.

October 26, 2010 Posted by | Financial markets in Asia | 36 Comments

Fasten your seat-belts

8:45 am  Tuesday  26 October 2010

I am sure that at some time or another, people have seen a TV coverage of the run of the bulls in Pamplona, Spain.  In many of those runs, you see people getting hurt when they try to cross the path of the running bulls.  I guess when you see a herd of stampeding bulls, it is never wise to stand in the way.

I am one of those who has been waiting for a correction in stock like AP and DMC.  I was even waiting for TEL to drop to 2600.  Unfortunately, I have been wrong.  I should have bought DMC again when it fell below 33 on Thursday or  even EDC when it dipped below 6 for a brief moment.  At this point, I am also entertaining in my thoughts some of the boring stocks like BPI, AC and MWC simply because the tide is raising the level of all boats in the harbor.

Like I said, in a bull run, if you just stand by, you get to be left behind.  That was really why I thought that even if many locals were skeptical about the CEB IPO, it should be bought.  Today, we see its debut.  It will either soar to the air with the greatness of ease or it will just stay put.  There is no way this IPO could run to the ground, not while the bulls are out there raging.  I am not in the habit of guessing where the price should be but a 10 peso move will not surprise me.  We should be in for some excitement today.

Do we just sit and watch the show?  Well, for those who missed it, I think there are a couple more IPOs coming.  The next one is Nickel Asia, and even now, I’m thinking that this nickel mining company will be oversubscribed by both local and foreign investors.  It is the oldest nickel mining company with a long record of profitable operations of the company’s other claims.  I suggest that people start queuing up with their brokers while it is still early.

I also learned that today, Credit Suisse starts operations of its seat in the PSE.  Another avenue for foreign money to enter this market.  I hope they come in with a bang not a whimper.  With bigger players setting shop, I can only surmise that as CEB takes off today, the rest of the market could be well sustained in its tailwinds.

Have a good week!

October 26, 2010 Posted by | Financial markets in Asia | 23 Comments


1:30 pm  Thursday  21 October 2010

Some people have dirty minds, and some people are plain and simple gullible.  If you are one of those who is in the habit of pulling pranks, you probably know that bomb threats cannot be taken lightly.  If you are the one being threatened, you have to be very sure of your security, otherwise, you will fall sucker to these threats.  What a way to spoil people’s days.  I think the first order of business in the PSE and the Ayala Tower One property manager is to take their security controls more seriously.  While you see these security guards accosting people who enter the premises, there are still many who get through without scrutiny at all.  If things remain the same in that building, we will see more of these disruptions which takes a lot of wind out of our sales.  When there is momentum in the market, there is nothing like a bummer such as this to leave people like me frustrated.

I was quite keen on picking up some EDC, DMC, TEL or more of ORE today; but I simply threw my hands up in the air and left it.  I do not want to make my calls when disruption psychology in the market abounds.  I think many investors have lost their focus today.  I will choose to trade another day when there are fewer distractions.

7:00 pm

It is not all bad news after all.  The market seemed to have move up by 57 points and all our favorite stocks were winners today.

October 21, 2010 Posted by | Financial markets in Asia | 65 Comments

Slippin’ and dippin’

11:10pm  Wednesday  20 October 2010

Today was something of a roller coaster ride.  The market opened with sellers taking the market down with broad range of large cap stocks.  In my view, those stocks which sold down were from weak holders, i.e. momentum traders and those who had become nervous with the strength of the market.  What is clear to me is that at lower levels, the market found strong demand for stocks like AEV, AP, DMC, AC, TEL, MBT, just to name a few.

From where I was sitting, a good number of my favorite stocks looked worthy of being tucked away into long-term portfolios even if I believe that we will not see the market spike up as much as it did in September.  The reason being that value turnover has not been as robust as it was in late September.

The benefit to investors of periods such as this is that stocks can really get cheap.  Some examples:

a. AP traded to a low of 25.10 then closed at 26 after seeing a high of 26.20.

b. EDC traded to a low of 5.94 and closed at 6.01.  My view is that this stock is a buy below 6.

c. DMC traded to a low of 32.70 which is probably a safe level to buy the stock.

d. SMPH hit a low of 11.54.  It was 11.90 yesterday, and it closed 11.70 today.

So far consolidation moves have been in short intra-day periods.  What it tells me is that sellers are not at all anxious about their positions.  Many are sitting on comfortable returns and do not mind giving some profits back to the market in anticipation of further strength down the road.  This is what bull markets are made of.

I hope you notice that I have been avoiding comments about the foreign markets particularly the DJIA or the S&P500.  It has become clear to me that there is a divergence of the PSEi from the developed markets for the time being.  The theme is really Emerging Asia and a lot of capital is coming this way making very little sense for even locals to look to markets abroad.

There are pretty good stories in local stocks.  Lately, the mining sector has een showing a bit of life.  I sense that with a global stock-piling in process, we should be seeing good metal prices for another 2 or 3 years.  That is also why I continue to hold PX and ORE, especially because in a week or so, a mining company named Nickel Asia will be listing in the market.  The IPO should provide another benchmark for mining shares.

I think that as greater constructiveness develops in the market, even third liner stocks will be livening up.  Over the last 3 days, I have been seeing interest in stocks like FOOD, RFM and COAT.  Of course, stocks like SLI or VLL need to develop greater following from among fund managers both local and foreign.  I am hopeful that can happen particularly because these are pretty decently managed companies.  I hope there is more fodder to feed the bulls because everyone would like to see this herd keep on running.

October 20, 2010 Posted by | Financial markets in Asia | 23 Comments

The patience to be right

9:15pm  Tuesday   19 October 2010

From the way prices behaved today (Tuesday), I cannot help but think that stock prices in general will continue to consolidate.  The quick recovery of MBT gives credence to the notion that there is nearby support for the stock.  While my view on MBT is very constructive, I think that some more squeezing out from weak hands will be happening over the coming trading days.  I do not think MBT will be moving up yet.

I had a look at how EDC traded today.  I like this stock a lot because it has one of the most important resource in the country – the geothermal deposit in Ormoc where it produces about 700 megawatts of electricity from 5 generating facilities.  While EDC similarly recovered today, I sense that there will be some sellers emerging at slightly higher prices.  I honestly think that EDC can do much better if it goes down below 6 so that firmer hands can take over.

My favorite DMC was starting to trade below 33, but enthusiastic buyers took it back to 33.50.  Personally, I would rather wait.  I really like to get back in the stock, but I think time will cure my restlessness.  Whether I buy it higher or lower matters less than the comfort of buying it after it has consolidated.

TEL has also come of a bit and is starting to look interesting.  Having sold the stock above 2730, today’s level of 2660 is already looking to be a good buy back level.  On second thought, I will probably wait a bit more, but 2600 on TEL will be difficult to walk away from.

SECB went ex-cash dividend today.  They are paying a total of 1 peso cash dividend on November 19 which makes a total of 2 pesos paid so far in 2010.  I think interest will continue for SECB.  The second tier banks still look cheap and SECB appears to rank high among fund managers.  SECB may be a better performer than PNB and RCB at this point.  Nevertheless, given the underlying fundamentals of the economy, investor should not ignore the banks.

There have been concerns about SLI slipping much from the highs of 2.45 to 2.50 last month.  The concern is if this stock has already run its course.  Personally, I do not think so.  I think the stock will still move beyond 2.50.  It will just take some more time.

I received a comment that one reader has posted pictures of the ORE mine site on Facebook.  Thank you.  I think at this point, some fund managers have assured themselves that ORE indeed has a producing mine and will be shipping soon.  Moreover, I think some investors are slowly being convinced that the reserve level of the mine is quite extensive.  My take on the stock is that it will eventually attract the cash of other resource funds overseas.  I was just at a meeting earlier today with a metals trader.  He was telling me that there is quite keen interest in funding metals.  Of course, a stock like ORE has to be marketed to these overseas fund managers.  If there is that much nickel on the ground, it is just a matter of time.

I would also remind DGTL followers to keep an eye on the stock.  It has been quiet lately, but you do not see any selling in a big way.  I sense that there may be a big move soon.  But even if it takes longer, I have chosen to be a lot more patient on the stock, just like I think we will need more patient in the broad market for the time being.

October 19, 2010 Posted by | Financial markets in Asia | 26 Comments

A tipping point?

9:30am Tuesday  19 October 2010

Yesterday, I met with a European diplomat who was posted in the Philippines from 2002 to 2005.  The diplomat had left the country for an assignment in South America, in Uruguay to be exact.  For those who do not know where Uruguay is, it is a small country tucked between Brazil and Argentina.  Because it is not as vast as its two neighbors Uruguay chose to develop as Singapore did in Southeast Asia, as a financial center.  It’s capital, Montevideo, had been an off-shore banking center since the 1970’s where wealthy Brazilians, Argentinians and Chileans had squirreled away some of their cash.  Of course the mega bucks always find their way to Switzerland, but in essence, living in Montevideo would give you an idea of how the wealthy in developing economies behaved with their wealth.  Furthermore, you would have had a profound view of a BRIC country such as Brazil, one of the most dynamic economies of this decade.

This European diplomat was reassigned to Asia in 2007, but no longer in the Philippines.  The person got a posting in Thailand.  I got to know about this person because the diplomat had invested in the FAMI equity fund and similarly maintained a Firstmetrosec securities account.  It then occurred to me that perhaps this diplomat had a Filipino spouse and thus the reason for keeping investment in the country.  I was wrong because the spouse was also European.  I have no idea of what this person’s entire investment portfolio looked like, but I had to ask why this person kept on investing here considering that there was no familial link to the country.

The answer was pretty straightforward.  This person was of the belief that investment in the developed countries will not be seeing significant growth in the future.  East Asia was likely to outpace the developed markets and this person believed that the Philippine market was a good place to diversify into.  Remember, this person had already been exposed to Brazil.

This is probably a unique story, but what strikes me about it is it comes directly to my sphere of experience.  I cannot ignore phenomenon in nature that when you see an ant in your kitchen, you know that it is not alone.  So when I see a foreign individual investing directly in the Philippine market, he or she cannot be alone but likely to be part of an unidentifiable group of like-minded people.  In the best-selling non-fiction, The Tipping Point, the author notes that oftentimes we do not spot a trend until a point when a critical mass is already involved.  Thus, the tipping point.

What comes to mind is the foreign capital that is probably massing into markets such as ours.  It is probably just in the process of building up.  We have probably seen just an ant, but there is likely to be a swarm that is there but is not yet visible to us.  Its significance to day-to-day trading in the short run is that it underpins values of the high-profile stocks in the market.  No wonder MER continues to be expensive and the buying on AP and AEV continues to be relentless.

Thoughts pass through my mind that perhaps the reason that PEs are rising is because there are simply a lot of buyers waiting in the wings.  Perhaps, that is why in spite of a not so warm reception of Cebu Pacific among locals, the stock is oversubscribed by foreigners.  Furthermore, I do not believe that foreign funds are simply being sucked into this market.  I think that there is a deliberate move to increase long-term portfolio weights in this market simply because there is a swarm of individuals wanting to gain exposure to this market.  Who knows?  I may even be right.

October 19, 2010 Posted by | Financial markets in Asia | 34 Comments

Bad news bears or bulls?

10:30 Friday  15 October

This may sound a bit twisted to some but I am actually happy that the market is down.  I would have been more exuberant had stock prices dropped much lower.  Some readers had asked about MBT because it dropped to a low of 68.90 at one point today.  If you recall, MBT sold Php 5 billion of shares earlier this year, and yesterday, MBT said it aims to raise another Php10 billion via a special rights offering.  Shares fell over the past 2 days as investors took profits and to clear positions in order to take in new MBT shares from a rights offering. With the chart showing some kind of resistance above 75, it was easy to see why many foreign funds sold it down.  Some quarters see it as revulsion by foreigners who were surprised that MBT is raising funds again.

Personally, I would like to have more of these things.  Just two trading days ago, we saw a placement of Php 6.55 billion of SMPH at 11.50.  That is really what bull markets are all about – so that companies will be able to raise new capital and generate wider shareholder base.  I think a lot of MBT investors should have been very well rewarded already since this stock had come from 45 no more than 5 months ago.  I think the downside might be 65, but I reckon smart money should be picking up slightly below this level.

For followers of ORE, my sources have determined that there is nickel in the mine and the shipment in November is almost a certainty.  I think this stock will gather a lot of confident investors in the next few weeks.  Personally, this was the last bit of news I had been waiting for to add to my position.  Surely, there were quarters that were trying to keep interest in the stock.  That is why it looked to be a stock that was being jockeyed.  With the verification of the mine site, the question now is the mine’s profitability and I think further research will bear that out.  I am of the belief that buoyant metal prices should attract a lot of interest in mining shares.  Even now, an analyst tour of AT’s Carmen mine in Toledo, Cebu is being organized.  Surely, mining looks to be the brewing story for 2011.

The Banks

With the big decline in MBT over the last couple of trading days may have made some MBT holders feel a bit jittery.  I do not blame them.  The normal knee jerk reaction of portfolio managers to a rights issue is that they are being hit for money again, i.e. not very  attractive when you’re not ready to put in more money.  Nevertheles, I was speaking to an analyst over the weekend on the MBT SRO and he puts the adjustment to be between 2.50 to 3 pesos.  Cosnidering that MBT was tading between 72 and 74 before the SRO was announced, the adjustment to 69 was probably just about right.

I forsee MBT trading sideways to slightly weaker for a day or so.  This could be a good buy opportunity for the stock.  One thing I am inclined to do is add to weighting of banks in my portfolio since even banks like SECB, CHIB and even BPI are presenting decent buy prospects.  There looks to be some interest in RCB as well, which should be a reasonable bet.

October 15, 2010 Posted by | Financial markets in Asia | 47 Comments

Cebu, my favorite destination

5:30 pm  Thursday 14 October 2010

Here are my thoughts on Cebu Pacific after reading analyst Kenneth Nerecina’s research report.  I am convinced to pick up the issue for the following reasons:

1. Its main market, the Philippines is an archipelago and air travel has become the most dependable and safe method of travel.  From 2005 to 2009, sea passengers dropped 3.2% while air passenger traffic rose by 19.4%.  This is because the comparative price of passage with sea travel has closed up substantially to something like a difference of 15%.

2. There is a lot of room for growth in Asia-Pacific regional travel as the Philippine economy grows.  Low cost carrier penetration from the Philippines is only 16% vs. 27-35% for other regions based on Center for Asia-Pacific Aviation data.

3. Cebu’s domestic airline passenger market share has risen from 28% in 2005 to 51% in the first half of 2010 which makes it the dominant player in Philippine air travel.

4. Cebu has a very young fleet and registered the 4th lowest cost per available seat kilometer (CASK) of US$ 0.048 and has the highest margin among global low-cost carriers which is US$0.0071.  Low cost producers of goods and services tend to grab bigger market share over time.  Having the highest margin gives comfort that operations will be profitable over the long run.

5. Mr. Nerecina values Cebu between Php 67.2B to Php79.7B.  Using 2011 forecast PE of 10.7X and EV/EBITDA of 8.1X for comparable low cost carriers, we derive equity values of Php74.4B and Php67.2B.  Discounted cash flow places value at Php79.7B which translates to a 2011F PE of 11.5X.

Essentially, I think that Cebu Pacific is neither cheap nor expensive.  However, being the dominant player in this market, I believe that it can command a premium because it is effectively the only decent exposure that investors can have in the transport sector.  Also, low-cost carriers are in fashion among portfolio managers around the globe because of its growing market share even for business travel.  Finally, given that the market is fundamentally bullish and there is very little supply of good stories in our market, demand will outstrip supply of the issue.  There will be very little compulsion for people to sell it down.  Given that JGS has sold a good portion of their holdings, should the price fall below IPO price, they have good reason to buy it back while new buyers will really have no reason to sell.

The risk reward outcome of buying Cebu will either be even money or positive return which makes it compelling to buy the issue.

October 14, 2010 Posted by | Financial markets in Asia | 43 Comments

Bubbling in a drought?

7:10 pm  Wednesday 13 October 2010   PSEi 4194.06

It may be confusing to some players that many stock prices fell in early trade.  I think many were expecting it and were waiting for prices to come their way.  Surely for ALI, when the implied support level of 16.50 was almost reached, a good amount of buy orders came in.  Actually, the low was only 16.70 which is slightly above the support.  We can observe a similar move in MER which seems to be supported at 215.  Even JFC which is not really a heavily traded stock, look to be well supported at 87 with little volume.  AEV on the other hand has been more relentless than its outperforming subsidiary AP as the pair went in opposite directions.

What I am seeing here is classic bull market psychology where large cap stocks are being bought whenever the market dips.  You can even see it among the big banks as MBT, BPI and BDO are showing good support at these levels.

Today’s moves convinces me that there are still a lot of buyers waiting in the wings for opportunities such as today.  What confirms the bullishness is the price action that happens at the support which is a surge in buying.  Stocks may be looking a bit lofty for us who watch it from day-to-day, but to investors who are compelled to add to their portfolios, their point of reference is not the past but the future.

Yesterday, July export figures came out as a 36.6% increase y-o-y.  I find that very impressive because this brings to a 7-month streak the steady rise in exports, and all of this is happening in spite of a very strong peso.  The net result will likely be more robust consumer sector which effectively fuels 78% of the domestic economy.  With more income filtering through to the hands of middle-income and higher earners of the economy, it is inevitable that housing and property prices will remain buoyant; and property developers should be on the receiving end of demand.  I, for one, made an inquiry in a development near my neighborhood and found out that over 50% of the units had been sold.  The project had not even broken ground yet.

Of course, people like you and me will start to question stock valuations at these levels.  Rightly so because if we did not, we’d be investing purely on reasons of greed.  Such are the conditions that bubbles are made of.  Fortunately, as we look closely at many of the headline stocks, they are not really that bad particularly on the back of low interest rates.  The 10 year government bond looks to be trading below 6%.  When you plug this yield into a discounted cash flow model, you automatically arrive at higher valuations.  When you consider as well that lower interest rates bring about tolerance for higher price-earnings ratios, you have to rethink the notion that stock prices are already sky-high because the numbers will not bear the notion out.

So, is this such a bubbly market?  I do not think so.  Is there a possibility for a deeper correction?  Yes, that is always possible.  What should a sane investor do at this point?  I would say, continue to examine the stocks you want to buy.

Incidentally, I think greater interest has been developing in Cebu Pacific.  I think that is very healthy.  It confirms investor appetite for local assets.  It is also not surprising considering the drought we’ve had for new issues in the last 2 years.

October 13, 2010 Posted by | Financial markets in Asia | 39 Comments