Gus Cosio says so

Ideas on the Philippine Stock Market

Risk and reserves

Friday’s price action should speak volumes to us.  According to basic economics, the most objective method of allocating resources and risk is the price system.  What it means to market practitioners is something like this:

a) The supply of a stock in the market is a function of its market capitalization and its market float; b) the supply in the market increases when holders of the stock offer more of it to the market;

c) when prices go down to a level where a lot of buyers emerge, that means investors find the stock already resonably priced or even cheaply priced;    whenever people think that a stock is cheap, what they are really saying is that the risk over reward is low;

d) when willing buyers decide they can pay higher for a stock but is not met by enough supply, prices will likely move up because investors are again saying that they think the risk over the reward is reasonable.

The bottom line is that a stock is worth what people are willing to pay for it.

Friday’s action tells me that the willingness to pay up for stocks very much in the market.  That was confirmed by today’s price action.  People want to own stocks simply because the alternative investments do not offer the future returns and liquidity that is available in equities today.  In fact, returns in fixed income and money market actually suck implying that the risk environement appear very tame to most investors.  It is so tame that not taking a risk has become so boring.

Over the weekend, I looked back as far as I could to have insight on the main risk factor that had caused major downturns in the Philippine market.  If you track Philippine financial history, the main risk factor had always been the threat of capital flight from the country.

The threat was prevalent during the martial law years and was heeightened by the Aquino assassination.  When investments gathered steam after people power, capital flight was again fueled by the demagogue Gringo Honasan with his coup d’etat and military misadventures of 1989.  The enthusiasm of the Ramos years brought capital back only to see it flee again during the Asian Financial crisis which ignited in May 1997.  The economy was just recovering in 1999 when massive capital flight again was spurred due to the mis-government of the Erap administration.  The lucky GMA managed to pull off capital inflows with the passage of the EVAT law.  She was even luckier this time around because most of the export infrastructure that had been conceived during the Ramos administration was finally paying off mainly because the dollar had soared to 55 pesos to the buck.  The economy had started to generate its own capital due to an increased level of savings in the economyt supported by OFW remittances.

What is significant in the long market decline from October 2007 to March 2009?  In the middle of this period, instead of seeing capital flight from the country, we actually saw a reverse as wealthy Filipinos brought back to the country a good portion of the wealth that they had stashed abroad as risk was being perceived to be higher in the U.S. and Europe.  With this perspective, it is not surprising that we saw a very strong recovery of the market in 2009 and market corrections in 2010 had been relatively shallow.

In the past, capital was sensitive to flee the country at any instance of political or economic instability because there was not enough foreign exchange in the country.  Today, there is no such FX shortage and even when foreigners got out of the Philipiine market between late 2007 to mid 2009, gross international reserves grew as the country’s current account surplus produced an over-all balance of payments surplus.  Philippine gross international reserves now amounts to close to US$50 billion, equivalent to 9 months of imports.  Capital flight and the threat of it has become less of a risk and will likely make domestic investors more confident in the loacl market for as long as company results are positive.

The trick now really is to discover what people will view as the next major risk to capital flight.  Right now, I cannot think of anything so significant yet.  That’s probably why we can’t keep the equity market from rising further.

I hope some of you were able to pick up some SLI.  The price moved in a major way today.  Tomorrow, I can probably write about ORE; I still have to digest the analyst report that I am reading.

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October 4, 2010 - Posted by | Financial markets in Asia

32 Comments »

  1. Excuse me sir gus…

    i would just like to clarify what i really meant by DGTL having bad fundamentals..

    what do we really mean by fundamentals?

    what i meant when i said that DGTL has bad fundamentals is those numbers found on their financial statements..

    i will post them here to demonstrate..

    DGTL
    P/BV = 6.50

    (this means that you are buying the company 6.5x more expensive than its book value)

    debt-to-equity ratio = 57.87

    (this means that the total liabilities are 57.87x their total equity)

    Equity-to-market cap ratio = 0.1451

    (this means that out of their total capital, 14.51% is left after expenses and debt)

    Price-to-earnings Ratio = 33.78

    (this means that you are paying 33.78 pesos for every peso that they earn)

    i will also include here the fundamentals of their industry peers..

    TEL
    P/BV = 4.96
    debt-to-equity ratio = 1.81
    Equity-to-market cap ratio = 0.1921
    Price-to-earnings Ratio = 12.30

    GLO
    P/BV = 2.54
    debt-to-equity ratio = 1.74
    Equity-to-market cap ratio = 0.4038
    Price-to-earnings Ratio = 9.68

    please anyone correct me in my numbers if you see some errors or if it needs updating.

    i think that by comparing their numbers, DGTL is beaten in all categories by GLO and TEL..

    this is what the numbers are telling me.

    but what are these numbers? i think these numbers represent the past and some of the present.

    i dont know how to interpret numbers for the future. i dont know how to do forecasting.

    but dont get me wrong sir gus, i also believe in the Gokongweis. i am very impressed with what they have achieved with Cebu Pac, URC and JGS. All these businesses have successfully executed their marketing strategies. you can see their goal is to really be number 1, to differentiate from their peers and change the thoughts of the market. even with sun cellular. i hear that they have been slowly eating up globe’s share of the market. who knows, maybe someday Sun will be the healthiest of all them all (fundamentally) while being the number one. it is very possible.

    but before i speculate, as an investor, i’d have to check the numbers first.

    it is clear to me that if ever i would be buying DGTL, i would be buying it for my belief that DGTL will be able to pull it off, not because of their fundamental numbers, but because of the intangibles, especially because they are run by the Gokongweis.

    Comment by cliffhanger | October 4, 2010 | Reply

    • The reason why value investors look at these numbers is one of protection and not of forecasting. Ben Graham in his writings, and according to the interviews of the people that knew him – does not look for growth. It does not matter if the company is poised to become the next Microsoft. If it did not pass a certain stringent financial test, it will be out of the picture. – But as long as its dirt cheap, he will buy the stock because he believed that sooner or later, say 2-3 years, the price of the stock will reflect its intrinsic value. This value is determined at the time the calculation made as does no take into account future performance of the company.

      Growth investors on the other hand looks for such things are growth and the future performance of a company.

      So when you see a company like DGTL, the assessment will be different depending on which side of the camp you are on.

      I’m about 80% value investing and 20% growth and my portfolio reflects this fact. i.e. out of the 8 issues I own, only DGTL did not pass the magical threshold barrier 22.5 (pe x pa)..

      fyi

      Comment by jasper | October 4, 2010 | Reply

      • Hi Jasper..you said, “But as long as its dirt cheap, he will buy the stock”. What is your basis for saying that a stock is “dirt cheap” ? Is there a formula or benchmark that we can use to compute how much (price range) we should buy a specific stock? Assuming that they are correct, you may use the financial ratios of either DGTL, TEL or GLO used by Cliffhanger above to make it clearer to us newbies. Please indicate at what price they are dirt cheap or undervalued. Thanks.

        Comment by Newbie | October 4, 2010

      • DGTL is cheap compared to the future earnings it will have. You are not able to compare the financials of DGTL and TEL/GLO as they have incurred losses in prior years. It is like comparing apples with oranges. It takes time to have your presence felt in the telecoms industry. TEL/GLO are already mature telecom companies while DGTL is still in its growth stage.

        PLTL was trading at 2-3 with very bad financials, but it
        was a growth stock as it operated in losses in prior years until it traded at 8-9.

        DGTL will not have to pay taxes of 1B from its NOLCO. It also has newer equipment compared to the other companies which is the reason they can have offer unlimited calls.

        TEL and GLO are trading at 8%-10% yield. Telecom industries normally pay a high dividend rate as they are in mature industries. Verizon and AT&T are paying dividends of 6% in the US.

        Comment by alexis | October 4, 2010

      • To “newbie”:

        You need to read the book ‘Intelligent Investor’ or even ‘Security Analysis’ to get the meaning of ‘dirt cheap’ (But the simplest formula is – the PExPB should be < 22.5x). But essentially, you should not be willing to pay for future promise. It needs to be earning now, and it needs to be earning consistently for a period of time. There is no 'finding the next microsoft' and stuff like that.. because the future is unpredictable. This ties to the central concept 'Margin of safety'.

        (btw: finding a cheap stock does not mean you will make money off it)

        But the bigger question however is – do you really want to go down that road? Is that the strategy you wish to employ in your stock picking?

        Because remember that turnarounds do happen, and that even the greatest stock start somewhere. Peter Lynch bought Chrysler when it came out of bankruptcy in the 80's and he was well rewarded for it. A company can be 'basura' now but later on it can grow so large, you'd wish you bought it when it was trading at 1.4p/share.

        but you have to have the time to investigate. If you don't have it, its better if you are more conservative and stay away from turnarounds (Pick something like TEL or CEU. They both have 9% yield)

        Comment by jasper | October 5, 2010

      • Jasper,
        These are very good comments, thank you.

        Comment by Gus Cosio | October 5, 2010

  2. Hi Sir,
    I currently have cash worth 75% of my current portfolio. I would like to ask you opinion on priority of investment at current prices. Im looking at AP, MPI, PX, DMC, DGTL. Are there other issues that you may want to suggest?
    Appreciate your inputs.

    Comment by Mark Anthony | October 4, 2010 | Reply

    • Mark Anthony,
      I like all your issues. i think they’d all have some more upside. I will recommend some top slicing at some point and rotate to potentially faster rising stocks. Your stocks except DGTL and PX have gone up spectacularly over the past month.

      Comment by Gus Cosio | October 4, 2010 | Reply

      • Thanks sir. Are you suggesting DGTL and PX will potentially be the rising stocks? any suggested issues or sectors for me to follow? thanks again.

        Comment by Mark Anthony | October 5, 2010

      • Mark,
        I am not suggesting anything. I am saying that I like DGTL because it has such a good story behind it which is that it is gaining market share while GLO is losing out. I also know that they now have a critical mass of subscribers which means they are committed to the business for long time to come. As a result, they should be producing better bottom line down the road. My view is that their bottom line would be approaching Php1 billion soon. as a result, the share price should be reflecting it.
        PX on the other hand is the safest mining play. With metal prices rising, I have no doubt that the price of PX should rise.

        Comment by Gus Cosio | October 5, 2010

  3. hi sir gus,

    what do you think of fgen stocks? it has already gained some good increase this september. As i see in its historical charts, it seems to rise every last quarter of the year in the past.. do you think it will still continue to rise until end of the year?

    Comment by mike | October 4, 2010 | Reply

    • Mike,
      Let me put it this way. There is a lot of money driving up stock prices. Money sloshing around the market is not about to dry up yet, not even at year end.

      Comment by Gus Cosio | October 5, 2010 | Reply

  4. sir gus,
    cebu pac ipo is near. how do you play this? what’s your TP for it? thank you for the insights

    Comment by poker | October 4, 2010 | Reply

    • Poker,
      I like cebu pacific and i believe the stock would rise after the IPO. I just have no clue up to how much.

      Comment by Gus Cosio | October 5, 2010 | Reply

  5. Looking forward to your ORE analyses sir Gus. We have been experiencing just intraday corrections most of last week, and it seems that foreigns are just rotating from one sector to another. Are you inclined to favor this belief, and if so, does it mean that hot money is going to stay with the PSE till year end? Thanks for all your insights. GBU sir Gus!

    Comment by jojo | October 4, 2010 | Reply

    • Jojo,
      In my opinion, foreign funds are rotating and simultaneously raising their stakes in stocks such as TEL, AC, AP, ALI and MBT. The foreign funds are still important in the market, but the locals are now a force to contend with.

      Comment by Gus Cosio | October 5, 2010 | Reply

  6. good evening sir gus,

    SCC was upgraded by COL to 196. And I heard somewhere that SCC will be included in the index in the future. Would you like to comment on that sir? Thank you..

    Comment by richie lim | October 4, 2010 | Reply

    • Sorry Richie, I do not have that information.

      Comment by Gus Cosio | October 5, 2010 | Reply

  7. Here’s my attempt at contribution 🙂

    All the current numbers are just indicative. High P/E, P/B only means a lot of people believe, rightly or not, that the company is worth a lot.

    As for D/E, debt can actually be good esp if you’re setting up infra which takes time to mature and start earning. Allow me to illustrate:

    DGTL has 87B in assets mainly in infra. Say D is 85.5B, E is 1.5B, D/E is 57. If income is 145M, ROA is 0.17%, ROE is 9.67%. Now if Say D and E is evenly 43.5B each and income is 145M, ROA is still 0.17%, but ROE is a dismal 0.33%. Remembering that your stock is equity, which would you rather have?

    Another thing is if DGTL goes belly up, how much do stockholders lose? Is it better to lose 1.5B vs 43.5B?

    A high D/E seems alarming, but does it look like DGTL is alarmed? Are creditors and suppliers alarmed? Or are there still creditors and suppliers willing to lend and sell? Maybe someone can tell me/us.

    Comment by Jay | October 5, 2010 | Reply

  8. WHAT’S YOUR PRICE TARGET FOR SLI SAY 1-2 MONTHS FROM NOW? ANY CHANGE IN OWNERSHIP OR FUNDAMENTALS THAT MADE YOU CONSIDER THIS ONCE CONSIDERED BASURA STOCK?

    Comment by mike | October 5, 2010 | Reply

    • Mike,
      Basura stocks are those that do not have underlying business that generate income and cash flow. SLI (Santa Lucia Inc.) has been developing property since the 1980’s. It got its listing through the backdoor by buying a listed company. It may have been an overly neglected stock in the past, but now people are seeing activity and the existing shareholders themselves, I believe, would like to see active trading in the stock. On a target on the stock, I do not have one as I usually do not focus on price targets because the market is a better judge of where the price should be. What I try to gauge is whether or not players and investors have rising interest or are losing interest in the stock. For SLI, I think it is only recently that I am seeing wide interest.

      Comment by Gus Cosio | October 5, 2010 | Reply

      • thanks for your thoughts

        Comment by mike | October 5, 2010

  9. What’s your take on the SEC approval of the REITS guidelines? Isn’t it the BIR that’s holding this issue back?

    Comment by Mal | October 5, 2010 | Reply

    • The SEC guidelines are there. It is the BIR that is holding things up.

      Comment by Gus Cosio | October 5, 2010 | Reply

  10. Just saw in a forum that Abacus’ computation of DGTL’s NAV is 2.80+. I have not seen the actual analyst report though. Just an added info for DGTL lovers 🙂

    Comment by MJL | October 5, 2010 | Reply

    • Thanks for your input.

      Comment by Gus Cosio | October 6, 2010 | Reply

  11. Hello Gus,

    I sure hope you saw my movie WALLSTREET already =) RFM has started to move, I was to late since my friend recommended it last night and I had no cash now =S I read a report saying it should be around 2.70 Any thoughts on this? I this stock still a good buy at current prices? Thanks!

    Comment by Gordon Gekko | October 5, 2010 | Reply

    • I saw the old 80’s movie way back and thought Gordon Gecko looked too much like Pat Riley. It turned out, it really was Pat Riley who was the model for the character.

      Comment by jasper | October 5, 2010 | Reply

      • ya he did look like pat riley huh… why is that? does oliver stone have a thing for him?

        Comment by cliffhanger | October 5, 2010

  12. Hi Sir,

    Im a newbie and i’ve been doing my preparations and researches in the past. is it still advisable to start buying stocks now? Regarding most stocks discussed here, Im afraid that most of them are already expensive. What stocks could you offer me to take a look at and buy? I will be starting my stocks trading venture this week. appreciate your help. Thanks and gbu

    Comment by alvin | October 5, 2010 | Reply

    • Alvin,
      If you are a newbie, may I suggest that you open an account with firstmetrosec.com.ph which is a very user friendly on-line trading site. Going to a live broker will only confuse you because those brokers do not have the patience to provide service to a newcomer. You’ll only get bad advice from them.

      Comment by Gus Cosio | October 5, 2010 | Reply

    • i suggest reading “the intelligent investor” by benjamin graham..

      sir gus, what other books can u recommend?

      Comment by cliffhanger | October 5, 2010 | Reply


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