Liquidity of risk
10:00am Thursday 6 January 2011
Wednesday was another one of those days when we had very strong moves, yet the rest of the market went the other way. It seems that the rest of the region was reacting to the further credit tightening going on in China. For one, I believe that the tightening that has been going on in the mainland will continue for most of this year. The Chinese authorities are very head strong and they have a record of pursuing policies to the end. In this particular case, they are looking to deflate any bubble that is brewing in the property market. A result of economic policies such as these is it tends to move the money to other places whether it be in the domestic economy or elsewhere. If China is suppressing invest money flow into domestic real estate, the flow will go on nevertheless into other assets which may not be in China itself.
In the same token, the Philippine situation is that the BSP is suppressing money growth by sucking it in to SDA. I heard a bit of information on the conduct of BSP open market operations and it seems that yesterday, they had started to refuse to accept some overnight placements from the interbank market. I am not sure of what is going on in that market, but it smacks signs of further excess liquidity in the money markets implying future declines in interest rates.
If there is any weakness in the equity markets, it will likely be temporary. While the January effect is coming three days late, I am convinced that January 2011 will be a very good month. I am benchmarking the year-beginning level of the index at 4200. This means that I will measure any market gains from this level. Undoubtedly, there will be volatile times ahead when we will threaten to go below this level. We should evaluate the conditions prevalent when we get there, but where things stand today, I think a lot of risk is worth taking.
One such risk is DGTL, a stock that I have been accumulating since August 2010. This means that my average cost is now below where the market price is. What is the downside risk? I suspect it is 1.37 which is the low in September 2010. What is the limited upside? I think it is 1.70 which is just below the highs of last year. That is around a 15% gain, if it gets there. What will bring it there would be if they disclose full year income of around Php 1 billion. My personal estimate is Php 1.040 billion which puts earnings per share at 0.163 per share. TEL is now trading at around 12X TTM PE. Of course DGTL should be rated lower, but at 11X PE, the price ought to be 1.79. Now the surprise will be if DGTL brings in full year earnings of above Php 1.1 billion. Anything like that will add a lot of momentum into the stock and should drive it to 2.00 or more. Obviously, this is a speculation that is why before buying or adding to a position, you have to ask yourself whether or not it is a risk worth taking.
For those who stuck it out with NIKL, it looks like things are paying off. NIKL is one of my strong bets in 2011. I believe that it will go to around 22 sometime during the year. By osmosis, its co-Palawanon, ORE, should benefit from the valuation of NIKL. Materials are in fashion as portfolio themes of global funds. I think that mining stocks that are regular exporters or producers should be targets of these portfolios. Local traders and investors should keep an eye on PX, AT, LC, LCB, MA/MAB and any listed mine that starts to produce. Mining is more risky than property or banks, but then again, some risks are worth taking.
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Gus Cosio at the Merrill Lynch 2008 Rising Stars Conference in Singapore
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Gus Cosio says so 
hi, Sir Gus since the time that i have watched you in GNN channel na curious ako sa mutual funds and finding way to start investing specifically sa Balance Fund kahit dun muna ko mag start sa monthly investment which requires minimum of 5K.We been calling your office po para sana magpa advise(we are newbie in mutual funds po kasi) kami on how to invest may mga office mate din kasi po akong gusto din sumali kaso po yung tinatawagan namin na mga person wala 😦
Mich,
Thank you for your feedback on your calls. May i ask you to email your phone number to belle.pajarillo@fami.com.ph so she can call you. You know, we have a limited number of customer service people, and because of the increased interest in mutual funds, they are always tied up with investors on the phone or inside the office. By the way, FAMI office is on the 18F PSBank Center, Paseo de Roxas corner Sedeno, Makati City.
Thanks for the reply sir, will send my contact number.
Hi sir. DGTL is one of the stocks I am considering. On the positive, it is trading at around 6.65x PE ttm, 0.66x P/S ttm. Recent growth points to a 0.02 PEG (of course, this may not be sustained). Only hesitation is the negative net in 2006 and 2008, and the solvency ratios. Using regression forecast, I still end up with a mere 2.35%annual income based on a weighted average of incomes from 2006 (of course, this is mainly because of the losses in recent years). Put that aside and I have a safety margin of around 64%, which points to a fundamental buy. Considering the market conditions, and the fact that market memory reflects at least the last four years, what is a convincingly good reason for us aside from the things you mentioned to accumulate on DGTL? Great blog sir. Thanks for all the insights. 🙂
RG,
My best main consideration on DGTL is growing faster than its competitors. TEL is at maturity stage and is looking for new growth drivers to raise its present growth rate of 4 to 5 %. GLO, on the other hand, is not growing but contracting. This means, it is GLO that is losing market to DGTL. This tells me that DGTL has more room to grow with its present momentum and it will likely be at the expense of GLO.
Sir Gus, still hesitant with DGTL. I agree that DGTL subsribers is increasing, however operating exp especially advertising exp. will increase too. I am thinking of a minimal profit margin.
1B net is minimal profit margin? (And with significant subscriber-gathering momentum too)
As for cost, I don’t know what they can do that would take so much money, that they haven’t been doing right now. Maybe the cost of the new cellsites?
Well, it could be that there are factors that might cause that net income to shrink but.. No matter how you look at it, 1B is 1B.. I think it would take a significant market decay for that income to collapse. Particularly since they have 1M+ post-paid subscribers.
DGTL is a turnaround so the loses would be the least priority. There is three question for me right now regarding this.
Q#1 if the loss is “so yesterday” and if it now will be profitable going forward.
Q#2 how much can you lose? Gus said the lowest might be 1.37.. (-14% from 1.5) – but bear in mind that during the correction last Dec when things was at its bleakest, it went down to just 1.41.. so if things go bad, I don’t think we’ll lose that much money..
Q#3 if DGTL’s value would take some time to be realized, then would I be willing to tie funds into this and lose out on other opportunities (For all I know MER might go down to 180 again)
Well anyway, I took a small position. One that I may or may not increase depending on if I can answer Q#3 to my personal satisfaction.
every quarter nalang turnaround na daw but every quarter loss pa din.
Reading today’s blog made me smile =) I’ve been holding on to my DGTL since August last year. With the current figures, I personally think it is worth the risk. This year, Sun Cellular aims to increase it’s cellsites to match that of Globe and Smart to improve their operations. This and with the growing number of Sun subscribers makes me confident and believe that the stock can reach P2 before the year ends (fingers crossed). BTW, nice price action by VLL today. I’m still smiling =)
Thanks, Sir Gus!
Sir Gus,
Any analysis on CYBR? 🙂
Looking forward to any insight from you regarding this stock. Thanks in advanced.
Happy New Year po sir!
Dennis,
If you look at CYBR’s financials, it has no fundamentals to speak of. What is going on is an M&A type situation where people are speculating that new assets will be injected into the stock thereby raising the value. It is a calculated speculation fueled by scuttlebutt in the market. It is like betting in a poker game, you stay in for the amount of money that you are willing to lose.
Thank you sir. I have accumulated CYBR since last year with an average cost of 0.58 🙂
Will sell above 1.20..
Looking forward to more of your insights from this website. It’s good that you are sharing what would otherwise be professional advice, all for free. Thanks again and more power! 🙂
Sir Gus, whats your position on MAC and PIP?
For MAC, there nickel project looks all set to continue.
Click to access dc2011-0104_MAC.pdf
Ken,
My problem with MAC is I have no clue as to where Mr. Lucio Tan wants to go with this company. Unlike Mr. Gokonwei or Mr. Sy, there are definite signals about where their companies are going. On PIP, I think this stock will range between 2.50 and 3, but you’ll need a lot of patience trading this stock. If you like it, put a stake in close to the bottom of the range. When it runs up, take some profits. I think in 2011, you will see that happen at least once which should give you a 15% return.
Thanks Sir Gus,
I’m already vested with PIP and just waiting for it to shoot up. After the expansion on their business on 2010, hopefully this bears fruits in 2011.
Do you see Nickel prices going up in 2011? I’m just betting on their Nickel plant.
Ken,I think nickel prices will be firm throughout 2011 due to recovery in the U.S. and continued demand in Asia.
to jasper and gus,
im beginning to appreciate smaller cap companies too after reading “one up on wallstreet” by peter lynch 🙂 not finished with the book yet, but im learning a lot so far..
his point on comparing market caps of each company relative to the total market cap, higher capitalized companies are less likely to significantly move in value compared to the smaller ones..this does make sense 🙂
Hi sir gus,
I have read that DMCI is planning to have DMCI Homes listed this year. How do you think this will affect DMCI when it becomes official?
I am holding significant amount of MWC shares and I am wiling to wait and keep it. But today MWC announced listing of additional shares. What are common shares btw? How will this affect the price of MWC. newbie here.
/rdthedeveloper
rdthedeveloper,
I understand DMCI Inc. has put all plans to list DMCI Homes on the exchange on hold. No reasons were given.
HI Sir Gus, do you still have MPI?
BY the way see you on Wednesday Sir Gus!! Already reserved seats for me and a friend. Will finally get to meet you in person! 🙂
Cholo,
MPI is one of our bets.
Gus,
What is your take NIKL? Do you think this is fundamentally sound?
If you back-read it was strongly suggested here that NIKL is worth at least 20.
That is proving to be prescient. It is near 19 now.. And to think it was just 15.5p two weeks ago..
Yes NIKL is fundamentally sound. the people behind it have been in the nickel mining industry for 30 years.
Hi sir,
Have you heard anything regarding LIB?
Mel,
I haven’t but judging from what happened to CYBR, there night just be something going on. But, CAVEAT EMPTOR!
Hi Sir Gus!
If a mutual fund has a 5 year return of 25%, is this a per annum rate or just a simple straight line rate of return? Thanks so much!
Ella,
In the case of FAMI fund, particularly the equity funds, the 5 year return is annually compounded because the fund continues to redeploy assets.
Sir Gus,
When I asked the other mutual fund company, they said that it’s not compounded. Cause you’re basically buying shares. Your return will depend on the performance of the fund.
Correct me if I’m wrong Sir Gus.
If I have 100K equity fund last year 2010 and have gained 25%, so my fund for 2011 will now be 125K? And whatever I will earn for this year will automatically be accumulated again for next year?
Thanks.
George,
Compounding is simply breaking up long periods, say five years, into yearly period. In concrete terms, FAMI Equity Fund, if you measure it for a five year straight line return, it would be 250% roughly; but that would not be the right way to measure return because the norm is to evaluate on a per annum basis. Also, simply dividing by five will give you a 50% which again is not a normal annual measure. If you compute 250% straight return on an annual compounding basis, it is approximately 25% annual compound return. Do you understand?
Pretty well said, Sir Gus. I appreciate it. My equity funds did well last year compared to my active trading. FAMI did well in 2010.
Thanks, Sir Gus.
Hi Gus,
May I know your thoughts on VLL?
Thanks
Very cheap and very undervalued. Not very popular from local investors. Strongly consolidating at 3.1-3.2. There is a buy recommendation from foreign houses. Heck, even Ben Graham would recommend this. Yes, I have VLL.
In the back of local’s minds they are always wary of Villar and the allegations of fictitious sales and bloated asset valuations made against vll, thats why it is very cheap and very undervalued. Ben Graham might recommend this but Noynoy will not
That is why you have to do your homework. Read the annual reports, read financial statements, the SEC disclosures. See the projects they are really good.
I saw the cerritos in pasig is. Or the one in antipolo. Then the vertical development in ortigas so I got convinced.
You need not fear just as long as you try to do due diligence.
how the heck did you do due diligence on their sales if these were fictitious or not?
For that matter, if you did your “due diligence” how much was cerritos valued that you flet it was a fair valuation? Or the one in antipolo. or vertical development in ortigas? I don’t disagree with you that due diligence is important but merely going to the project site isn’t really “due diligence” it isn’t even diligent! Its just “passing by” If you did real due diligence, you would have found how how much VLL valued these projects in their NAV compuation and acertained if the neighboring porperties had similar valuations etc.
Chris,
“An indefinite and approximate measure of the intrinsic value may be sufficient. To use a homely simile, it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age, or that a man is heavier than he should be without knowing his exact weight.”
For the sales – the annual report is enough. Then I correlated that to when I went to their projects and saw a lot of people putting money down. If the three projects are doing sales, then I just surmised that their other projects are doing sales too. Also I did not ‘pass through’ as it were, but I actually wanted to buy as I was looking for a house. I did not buy because it was too far from my workplace.
I do not know how you do your own analysis. It might be that you are able to do it more sophisticated than me. But for the amount that I bought, that is enough. Sure, I can be wrong. But thats why I protect myself by diversification, etc.
And yes, I agree that we need to compare. It just so happened that there was an Ayala-developed community near too. Alveo? I forgot the name, but the thing is – almost same lot-area, and the quality is the same (I think), but the Ayala one was more expensive by a few hundred thousand. And Camella was providing a 24-months dp scheme. So if I were a home-buyer, which I was that time, I was really attracted to the VLL developed property.
But if you ask me if I’m absolutely certain VLL will bring great returns, I will say not. Although I have about 15% of my portfolio here.
http://www.intelligentinvestor.com.au/articles/204/Be-vaguely-right-not-precisely-wrong.cfm
I just bought a vll property and i love it… i have been also accumulating vll stock since it has a very good pbv and has lot of projects…
I agree with you, except in this particular case. The allegations against VLL then was that it fudged the annual reports and the sales reports. I’m not saying these allegations have merit, honestly i dont know one way or the other. But if what was in question was the accuracy of these finacial reports and what you did was look through these financial reports parang it does nothing to verify the allegation diba?
Anyways hope you dont get me wrong, I’m not saying there is anything wrong with VLL
well, if in the u.s. enron can make a fool out of the system, it is not impossible for a company here to do the same thing and cook the books.
But that would take connivance with the accounting firm, or at least a passive approval. But SGV seems to be reputable enough from what I gather.
Bluecheap,
I personally own the stock because I have looked at its fundamentals, i.e. earnings per share, net asset value and price to book. They tell me that the stock is cheap. Also, Senator Manny seems to want to redeem himself, so he’s looking to have his people do a good job in the business. That is very important.
nice to hear that senator villar seems to redeem himself, so he’s looking to have his people do a good job in the business.it is because i have 2 units in one of his housing project and i personally known that some of the unit were built on a lot that his company has no title. but one thing good about it although they had built the house they didn’t sell it to the buyer.
I want to bang my head on the wall. I sold LR (Resorts World) stocks, two days ago for 3.55, because I wanted to clean my books. Now it waaaaay up at 5+.. haaaay!!!!! To think I waited too long for that stock to go up! Talk about wrong timing.
that would be a bummer all right..
maganda ba fundamentals ng LR?
no offense but i guess lets do our homework on that? these data are available on pse, col and reuters websites
/rd
LR has good fundamentals, plus they give out quarterly dividends.
i think LR price is forward-looking related to the casino project with Belle at the Bay area. Note though that net foreign buying on LR today is 62 Million which suggests that its price rise is supported by foreign fund.
Kristin,
What constitutes good fundamentals? Would you be kind enough to give the facts and numbers that make LR a fundamentally sound investment? Thanks.
Reuters
http://www.reuters.com/finance/stocks/analyst?symbol=LR.PS
Bloomberg
http://www.bloomberg.com/apps/quote?ticker=LR:PM
hope this helps 🙂
/rdthedeveloper
What’s your take on san miguel’s 40% aquisition on eastern telecom? Any positive effect on ism?
Cathy,
This tells me that they have become very serious in the Telco space. Eastern has very good telecom infrastructure. They are a main supplier of trunk-line and broadband facilities to BPO companies. They also provide wide broadband service to companies for corporate tele-communications.
any positive effect on ism?
A link, might be interesting for some.
http://www.valueinvestingpro.com/2009/10/27/walter-schloss-collection/
—
I’m really frustrated. I have a few stocks I wanted to buy. Some position I wanted to accumulate some more, but I’m absolutely starved of capital..
Ilalagay ko sa shoutout – frustrated stock buyer.. hehe..
Jasper… what stocks do you want to buy?
1. CEB – because I think the price has bottomed out. basically, we have everything to gain and just a small chance of losing. Plus with the delivery of the new planes, they are poised to grow
2. JGS- A strong conglomerate at 8x PE? sign me in.
3. ORE – waiting for the first shipment. I bought a few just to get my toe wet, but intends to buy more as long as the price is within 7p.
Good Day Sir Gus! Sorry sir I forgot to raise this question in our class. Anyway sir what can you say about the LR stock? Are there any important developments in this company that pushed the NFB to 62million? At its current level is it still safe to enter? Comparing it to Bel, which stock is better/safer?Is the LR company is connected with Mr. Andrew Tan’s(AGI) Resorts world or it’s just coincidence? Thank you and more power to you sir! Sorry sir if i’ve raised too many question. Btw sir your intro about derivatives rocks!! 2 thumbs up!
Thanks for the compliment, Den. I think it is safe to put a small amount in LR simply because gaming is a major theme in the Philippines for 2011. The reason I say small is because the stock may be volatile so you have to approach it with a good cash management approach. If it goes up and you buy again, your average cost will be below the market. Should it go down, then you can slowly average down if you still like the stock. If it turn out that you are wrong and want to get out, a small position will mean a small loss which you can learn to live with. Pretty much like poker, you do not put in all your money if you are not confident. You simply ante up to play the game.
Sir Gus,
Den mentioned “Sorry sir I forgot to raise this question in our class.”…
I’m just curious of it because if you do have a class, I want to join po sir…
Meron po ba?
Thanks po and GOd bless!
I am looking for ward to BEL and LR this week. These two put me in the green for the first timesince I started in November! Thanks sir Gus for your encouraging insight. I also boutght NIKL IPO and more after. Looking forward to this one as well. Thanks again!
Hi Sir Gus, I conducted a small consensus regarding your seminar and a lot of us here in Cebu are willing to attend. Some are your regular readers and some are not even aware of the stock market. I hope you can also make it happen here.. Thanks!
SOS Sir Gus!
What do the Risk and Beta numbers mean when they are referring to a stock?
hi gus
what do you think of RLC? Why did it go down again to 14p.. I understand JGS and the dilution factor, but why is RLC suffering the same downward fate?
i think RLC started to go down when some brokers downgraded it to HOLD due to its low income in 2010 and a planned rights offering soon. TP is still 19 so it might still go up.
I notice most of the gokongwei stocks went down recently while most of the san miguel stocks went up.
RLC will be selling Billion worth of Shares thats why its going down…
wow, today is quite the bloodbath.. :fear:
Hi Jasper,
If you had excess cash today, which stock would you buy?
I’m like, confused now. I stated that I was angling to buy CEB, JGS and ORE.. but prices seems to be falling down. Everyday they keep on getting lower.
I would not wish to catch a falling knife. I’ll probably sit on the sidelines and wait a few days.
But add RLC to the list of things I want.
same as JGS, RLC is planning to conduct a very big SRO. 1:2. Same as JGS dilution concerns is wieghing heavily on RLC
I wish RLC will not go down to 8/sh…
Candy,
I wouldn’t hold my breath for that to happen.