11:00 am Tuesday 30 November 2010
I think the local market is become very edgy, not so much because fundamentals among locally listed companies have changed but because the consolidation mood has taken hold. I am quite sure that many portfolios are paring down positions to protect the gains this year. If I were a fund manager and have given superior returns to my fund holders, I will not hesitate to lock in my gains now. We are approaching year-end which is a time of traditional book squaring by both position traders and portfolio managers. It is not unusual that markets become less liquid this time of the year. While, theoretically, there are about 19 trading days left in the local market, some of those days are very low in terms of volume because there are not enough orders coming from end customers.
There had been quite a number of questions on whether or not to run with positions on ORE and SLI due to some changes in assumptions. For ORE, the assumption was for a shipment to be made in December. Unfortunately, the company made a disclosure that due to heavy rains in Palawan, shipment will have to be postponed to 1Q2011. I cannot but help be anxious about this development. I would suggest for those who have weak holding power for this stock to reduce holdings for the time being and re-establish it as a time when the shipments are more certain. Investing in a mining company that has very little track record, I believe that one must be prudent in managing risk. If you have profits in the ORE position, I suggest that you bank some for the time being.
I feel somewhat anxious as well in SLI because of talks that there will be no follow on offering. An analyst told me, however, that based on the latest disclosure, the follow on offering will go through except perhaps the target offering price may be lowered somewhat. I have no clue as to where the new shares would be priced but the lingering anxiety will likely cause punters to shed some positions. I will probably do the same although I do not think I will wind down positions completely; I will simply reduce to comfortable levels.
As far as the strong stocks are concerned, I think I am comfortable accumulating MER at these levels. I feel the same way about MPI, DMC and AP. I would try to follow some of the banks that should be slightly cheaper compared to the past month such as MBT and UBP. In short, I think it would be good to raise some cash and use it to reposition in the strongly performing stocks notably those that have strong prospects or recurring earnings in 2011. Having said that I would add that the mining stories of NIKL and PX are worth a bet for the coming months due to what I feel to be a recovery in the U.S. economy.
10:00am Friday 26 November 2010
I will share my thoughts on the 3Q GDP figures when I write an update over the long weekend. In the meantime, I would like to share some thoughts on a few stocks due to comments given by some readers. My good friend Chris shared an idea on VLL with me because I assume he read my comment that I had taken profits on VLL. He had suggested that because VLL had been gapping up at the close over the last few trading days then it may be a signal that this stock would be moving up soon.
Thank you Chris for alerting me because VLL is a stock where I have a long-term commitment, meaning it will be a stock that I will continue to trade because I like the fundamentals. At my last count, this stock is still trading at a huge discount from its book value; at least 40%, maybe 50% discount. Now many investors may not like the principals of the company for one political reason or another, but the fact remains that over the last few years, the company has been delivering well on its projects. I for one, drive by on of their relatively up-scale project in New Manila everyday; and from what I can see, it is a well-built medium rise development which should be quite desirable when it is finished. There is also the high-rise across the ABS-CBN studios which from what I gather is also seeing brisk sales. Both projects are in winner locations. Of course, VLL is also showing a single digit PE which ought not be ignores.
Another stock, CEB, has been the object of a few queries. I have recently read full-scale initiation coverage reports of two major foreign houses. One estimates fair value at 145 and the other at 150. I continue to accumulate CEB on dips and I am happy to hold the stock until it crosses 140 at which time I will ask myself again if I still wan to wait for 158. In short, at milestone prices, I will evaluate whether new developments about the company at the time tell me whether the stock is still cheap of has become expensive.
NIKL is also a concern for those who bought some at IPO and added to positions on listing day. After evaluating the sellers and the sell volumes at various prices, I am of the opinion that 16 will be a strong support. In my count, over 50% of those who bought the IPO have taken profits all the way to just above 16. This tells me that those who remain holding the stock are looking for prices higher than 18 before they will sell.
For followers of DGTL, it seems to me that traders holding the stock have gotten worried or disappointed that the stock has not moved. We are not seeing sell downs in a big way. We are merely seeing a price erosion. I think weak holders of the stock ought to exit already because DGTL make take more time before it goes. I am still convinced that it will return 30% over the next six months, but those who cannot wait it out ought to sell already.
SLI had recovered a bit and should continue its rise except I hear there is a great debate on how they will price their follow on offering. I think that whatever it is, it should only be good for existing holders. I would be patient and ride it out. As for ORE, I will be holding my breath for a while as I follow their scheduled shipment for December. If they do not ship my Christmas, I will be seriously rethinking my view on the stock.
As for now, I would not worry so much about the market. I would be rebalancing positions; in fact I sold some EDCs yesterday because it seems to be having difficulty moving forward. I think FGEN would move in sympathy with EDC as well. I am considering picking up some MPI soon, but because of Chris’s observation forwarded to me, I am putting my money on VLL today.
6:15pm Monday 22 November 2010
Of course the day’s highlight was NIKL which went to a high of 19 but sold off to 16.50. What spurred others to sell was the selling activity of the three top underwriters – UBS, CLSA and ATR – presumably from foreign subscribers. It looks like they put most of the shares in the hands of punters. it does not look too good for the stock because if the market detects that there are no strong anchors for NIKL, it will languish among the dogs of the market. That would have been a great disservice to the company which is the most credible nickel producer in the country. Anyway, I am of the view that this is a temporary phenomenon and the stock will probably do better in the coming months. I think the global mining story is still of interest because investors are anticipating some commodity inflation due to the QE2 in the U.S. and the liquidity driven bailouts in Europe.
The rest of the market looks to be in consolidation mode, in spite of the market recovery on Thursday and Friday last week. This time around, I am confident that stock prices, even of the strong AEV, AP and DMC, will run away from us. The mistake that most people will make is sell inside their own cut loss levels. I think we may see 4000 again, but that should not worry us. For me, I will be jumping with joy when I see DMC below 34. I will be watching MPI and FLI because they are looking to be good trades again. More than that, I will be rethinking what I will be keeping as core portfolio for the first half of 2011. Right now, my candidates are CEB, VLL, MPI, SM, SMDC, and JGS. I will likely revisit a lot of the third liners like RFM and even FOOD, COAT or SPH.
Anyway, I suggest a bit of care and a lot of conviction built upon good appreciation of fundamentals. I am convinced that this bull market is still on a rampage. This retracement period, no matter how long it takes, is merely setting the stage for a bigger more liquid market that will help a lot more people to make money in stocks for some time to come.
9:15 am Monday 22 November 2010
The past 2 weeks was nerve wrenching for many. It was the first consolidation of its magnitude since June this year. The index retreat was only about 7.8% which by any standard is a shallow correction. However, it is understandable because the market is very constructive both due to positive earnings outlook on many stocks and the deluge of cash or liquidity produced by very low interest rates in most financial markets of the world, including the Philippines.. A number of our readers together with many retail and high rolling investors had become overcome with fear, anticipating a deeper correction. Fortunately for us who are more strongly committed to this market, most prices apparently have found their support levels and are starting to recover.
For all of us who are in the market for the long haul, I would like to share some advice given by Jack Bogle, the founder of Vanguard Investments, one of the most successful fund managers of modern times. He says that “If you have trouble imagining a 20% loss in the stock market, you should not be in stocks.” He also stresses that in markets, “time is your friend, impulse is your enemy.”
Investors must remember that what makes up a market place is the diversity of opinions of buyers and sellers. It represents the different levels of risk threshold that traders have and the boldness by which some can quickly take their losses and bravely buy in a falling market. I am not saying that there will no longer be corrections and strong price declines. In fact, the lesson of the past two weeks should make us more prepared for such fearful market actions. Those who are new to the markets must bear in mind that a day or so after they buy a stock, this stock could go down in price. That is why it is important that before getting into a stock, an investor must understand why he or she is buying. If you are buying simply because you are chasing a price, you will surely misinterpret price movements on the stock and will easily be whipsawed by corrections. But if you are convinced of its value, your risk threshold for the stock becomes deeper.
For example, a number of readers got nervous about MPI. From a high of 4.44, MPI dropped to a 3.68 low. The big question in people’s minds is whether or not the run on the stock was over and will this be the start of a long decline. If you understood what the value is in MPI, you can be certain that the decline was a buy opportunity rather than cause for panic. I can go down the line for stocks like EDC and even SCC. These stocks came under heavy selling pressure but have recovered creditably. I can go on with stocks like FLI, MER and also the blue chips like AC and TEL.
Anyway, I am of the view that the market will again assault the 4400 level before the year ends. I think the blue chips will lead the charge initially, but I think because NIKL will perform very strongly, investors will be looking to mining stocks particularly those with heap valuations. While we are back on the positive side of things, I think personal strategy should not be ignored. In whatever stock you go into in the next few days, make sure you know what your thresholds are because time will only be on our side if we have a trading plan in place.
I would like to share the latest disclosures of CEB considering that some of the major securities brokerage houses are issuing buy recommendations. I’d like to keep people informed about the issue which I continue to like. I particularly would like to point out their cost per Average Seak Kilometer which is an efficency measure that is crucial to Low Cost Carriers (LCC). I think we can get a good picture of investment considerations for this stock from this presentaion. Please click on the links above to read the contents.
7:30 pm Wednesday 17 November 2010
I believe a lot of people are running scared. People with huge portfolios are seeking cover as extraneous factors have come to haunt our market. Of course, what sparked the selling was profit taking on our shores. The foreign markets only exacerbated the selling pressures. Unfortunately, it looks like a short-term trend has begun and it does not look very good.
Honestly, I am still long but i have comfortable cash levels in my portfolio, and the stocks that I am holding have not yet gone to the loss region of my P&L except for SLI which I bought around 1.90 and CEB where my cost is 125. The rest like DMC, ORE, EDC, DGTL, JGS, and PX are still above my cost. I am not yet worried but I am convinced that some stocks are on their way to lower levels. I reckon these will be the main blue chip issues like AEC, AC, ALI, TEL, BPI, JFC, MBT, BDO, SM, SMPH, FPH, and MER. I think stocks with specific stories may be able to weather the selling storm much better because investors see them as special situations. If I had these stocks, I will probably look to sell on bounces for these stocks. Of course, that is easy to say because I was lucky enough to avoid them. Actually, when the market started trading above 4000, I purposely shed my index shares.
I would like to comfort those who are nursing underwater positions. If you are holding stocks that you are convinced about, the most you should do is to pare some of them down. You do not have to sell all of the position on each stock, just enough to have cash for averaging down. If you expect cash to come into your portfolio, there should be no cause to worry. Domestic interest rates are just too low for stocks to do a dramatic slide down. There is a lot of cash out there that is earning only 1.5% per annum in the bank or t-bills. This gives the BSP some fodder to lower SDA rates from its present lofty levels without fear that these deposits will all flee.
At the end of the day, we should assess things in a forward-looking manner. The question is “how do we see 2011 to be for the economy and for corporate profits?” I think the economy should carry on going from the momentum gathered this year. Furthermore, with infrastructure spending picking up next year, I see no reason for the economy to slow down. We are even expecting exports to continue with its growth trajectory, after all the developed economies are starting to experience inventory build up already. Some retailers in the U.S. are seeing a certain degree of come back by the average consumer.
At this point, I am reminded of the first lines of the poem “If” by Rudyard Kipling which goes:
“If you can keep your head when all about you
Are losing theirs and blaming it on you”
All I can say is, if we lose our head now, we lose our money as well.
11:08 pm Tuesday 16 November 2010
It appears that the bounce on Monday leaves conflicting views among readers. One big mistake investors tend to make is to create their outlook based on their own existing position. When investors are very long in their trading positions, they try to convince themselves that the market is going up. Conversely, those who managed to lighten up their portfolios and have sufficient cash in their balances are happy to see the market go lower in order to start new buying round. There is always the need to be objective especially when markets come to possible cross roads. My best advise is to understand every item in your portfolio. It is very possible that some stocks will decline while others become firm. There is no substitute for having an objective look at the condition of every stock.
Here are a few stocks I would like to watch:
EDC – I think the stock has hit the bottom of its range. I sense that it could range between 5.33 which was the recent low to 5.95 which appeared to have been a support level before it broke down last week.
DMC – I think the stock remains strong, I either sense or am hoping that it will ease further to 33.50 whereby a range could develop with a high of 36.50 and a low of 33.
FLI – Good fundamentals are being appreciated by investors. The stock has shown strong support just below 1.30.
DGTL – I am holding my breath for this unappreciated telco. Their business model is slowly gaining ground. It may not be a star but it ain’t no dog either.
ORE – Monday’s price action on ORE should not be ignored as there appears to be no large seller of this stock. We could surpass 4 by the time Nickel lists. ORE seems to be shining under the halo of Nickel.
TEL – I like this stock for its dividend yield and proven stability in revenues and earnings. I am afraid, however, that some portfolios are shedding TEL’s weight on their portfolios that I sense further selling. TEL may no longer be on the way down, but I doubt if it will bounce up strongly.
I am sure there are stories for every liquid stock and different views. What I want to highlight today is the idea that there are some stocks that look to be bouncing up from strong support levels while there are others that have some price erosion to go. One such stock could be SLI having broken through the 1.90 support. I think AP could also be facing further correction although many will dispute this. PNB is another stock which may see more downside if there is no follow through this week. In contrast, I see URC and RLC to be continuing its strength in this consolidation. For the mining sector, I believe AT and PX will benefit from the enthusiasm for NIKL.
All told, I believe it will not be an easy market for the rest of the week. The thing that is going for us is that the 91-day T-Bill auctioned on Monday were taken at a yield of 1.48% p.a. There is a lot of cash still floating around, and that is making stocks look really cheap.
9:55 Monday 15 November 2010
I think the first order of the day is to ponder at what stage of the market are we. Let us not forget that this market has been extraordinarily strong over the last 9 months. The Philippine market has had a life on its own diverging from the major market and somewhat moving close to lock step with Thailand and Indonesia – the area which has been referred to as TIP. The global story from the middle of this year has been that emerging markets, notably those in East Asia, was the place to be in investing. As investors fled the U.S. dollar, many added to asset allocation in TIP.
Let us once again put things into perspective. We began the year with the PSEi at 3050. On November 4, the index closed at the day’s high which was also the all time high of 4397 representing a 47% gain for the year. This comes after the previous year’s gain of 62%. We have seen tremendous gains in the most popular stocks such as AEV, AP, DMC, URC, MBT, PNB, UBP, AGI, JGS, and SM, just to name a few. We have also seen investors pay less attention to old favorites such TEL, GLO, AC, and BPI. We have similarly observed some attention moving to previously ignored stocks such as SCC, LPZ, SECB, MER and MPI.
We have to be rational about our market. Unlike the bigger markets of the world and the region, we have less than a hundred stocks that trade with acceptable liquidity. There are less than fifty stocks that institutional fund managers can trade with ease of liquidity. What this all means is that it is inevitable that fund managers, whether foreign or local, would try to protect gains. To put it succinctly, profit taking is unavoidable. This market needed to consolidate so that portfolio managers can earn their keep. In terms of money flow, cash has to be generated so that portfolio incomes can be realized.
How do the text books describe consolidation. One book I am reading describes it as: “A pause to refresh after a strong move. Also known as a pivot, because the relative-strength line of a strong stock will flatten or even turn down a bit during a consolidation.”
From this description, we can glean that all strong price moves necessarily eases at some point. I liken this move to that of an advancing army. In war, even if victory is at hand, the main body of a driving army does not deploy itself in the front lines. It regroups in a defensible location way behind the battle front. This way, it can adequately protect all the territory it has gained and set the stage for the next offensive.
At the beginning of the year, I was happy to see the market advance to 3600 by year-end 2010. Surprisingly, a surge of capital inflow pushed the index to that level in mid-year. My colleagues and I began to raise our expectations to 3800 for year-end, but the market continued to surge further even as the major developed markets meandered. Now that the U.S. market has regained its strength, it is no wonder that some money may be redeploying itself back to the U.S. at the expense of the strongest erstwhile market performers – emerging markets Asia’s TIP.
So, what can we expect? Is the bull run over? Are we facing the bear already? Are assets in bubble inflation at this point?
Well, I am the ever optimist. I have never seen macroeconomic conditions in the Philippines as good as it is today. I have also never seen companies in such strong financial and operating conditions as they are today. Even as the market appears to have gone through the stratosphere already, it does not look like the bubble that it was in 1997. Buildings are rising, but property prices have not yet exhibited any frenzied speculation unlike that in China. Furthermore, interest rates are at a level that easily can support current affordability levels. Bear in mind as well that 15 and 20 year mortgages are now commercially available which was not the case in 1997.
For us who choose to be in the market, we just have to put all of these factors in perspective. Like an advancing army, we must be prepared to set ourselves back and prepare for the next forward move. The fiercest warriors are those who have been battle-scarred. To be successful in trading this market, we should be prepared to take the scars of price retreats. Otherwise, we should not be here at all.
The Money Market Association of the Philippines (MART) is celebrating the Money Market Consciousness Week on November 15 to 21, 2010 (next week). They have asked to conduct an investment forum for common investors on November 17, 2010 from 1:30 P.M. to 4:00 P.M., at the 5/F, Podium 4, Yuchengco Institute for Advanced Studies, RCBC Plaza, Ayala Avenue, Makati City.
I have entitled the forum “Creating Wealth Through Common Sense Investing” and would like to announce to those who are interested to attend that you can make reservation through the MART secretariat at telephone numbers: 894-0148, 813-2571, 813-7479.
I understand that there is limited seating so if you are interested, please make an early call with your personal details.
11:27 pm 9 November 2010
Finally, the long awaited correction has arrived. Somehow, a continuous rally, no matter how strong, leaves me gasping for air. A retracement of the kind that we are seeing theoretically strengthens the move upwards. Here are some some fundamental and/or technical observations on stocks that I have been following:
AEV – the stock looks to have approached resistance and is forming a double top on the chart at 36. The relative strength index appears to be in the down trend. Being a holding company with a heavy weight on the index, it is important to follow where analysts place its Net Asset Value (NAV). I reckon it to be around 40 from what I have been reading based on the prices of AP and UBP – its biggest holdings. What this tells us is that we must follow this stock until we see some signs of it being oversold, then start accumulating the stock again.
AP – I am seeing an island top forming with a gap between 28.65 and 29.30. The stock has been in overbought levels for quite a while without any sign of consolidation. I cannot help but think that a broad based correction seems to be going on and AP should follow the rest of the market to a certain degree. The stock has more room to go as some analysts are placing the discounted cash flow value per share at 36.13. Some are also estimating 2011 earnings per share to be 3.57 putting PE at today’s close that is only 8.4X. If this stocks moves to below 28.65, we should be ready with some cash to pour into it.
EDC – Consensus 2011 earnings per share (EPS) on the stock is 0.40 which is below the 2010 EPS of 0.44 due to rehabilitation activities to be done at one of its plants. Nevertheless, 2012 EPS is expected to rise to 0.59 which is easily achievable given that electricity supply will be closer to the edge in 2012. Fundamentally, the stock should do well. Unfortunately, it has been undergoing some consolidation already for about a month now. At the close of 5.78 today, I think the stock price has come to cheap levels. While it may slip some more in the coming days, accumulation of EDC at these levels should pay off in a few weeks time.
DMC – This is another stock that will likely remain strong for some more months. I am guessing that because it is looking to be technically overbought, and the RSI is declining, the stock should retreat a bit. My guess is 35 where it will be relatively cheap given some estimates of EPS to be around 3.00 for 2011.
JGS – From a pure technical standpoint, JGS looks to me a good buy at these levels. The RSI measure is gradually rising while the price has been steady. It is pushing against a resistance at 26, and I am guessing that JGS can break through. From a fundamental standpoint, the cash which it generated from the CEB IPO should tremendously reduce debt. Given that earnings in portfolio companies such as URC and RLC have very strong showing and DGTL recovering, the NAV of JGS should be moving higher.
The consolidation also makes the old heavies such as AC, BPI, TEL, MBT, MWC, MER and ALI worth a look again. My message remains the same – money is abundant and will continue to chase assets. Those that are able to catch them early will benefit the most.