PSE Looks Interesting

Share price of Philippine Stock Exchange (PSE - P160.0) has risen by almost 10.4% in the past two weeks. The stock looks interesting. Here are some “intriguing” facts:

1.) PSE trades at 10x EV/Net Income. In 2005, PSE made roughly P130m in net income. The company has P1.0bn cash sitting in the bank. The valuation looks cheap considering that the financial services sector trades at average of 13-14x EV/Net Income.

2.) PSE was founded in 1927. It is an institution that has survived the times. There should be a franchise premium on the stock. I don't think another exchange in the country will come into existence in the near future.

3.) The SEC is pushing brokers to reduce their stake in PSE. It seems that a follow-on offering is around the corner. Brokers will not agree to sell at these levels. So most likely, some market making of the stock has to be made to entice brokers to sell.

However, on the flip side, there are a lot of things that has to be done to make PSE into a world-class exchange. The exchange still acts like a purely regulatory body more than a financial services company. It has to do more to increase the investor base in the country.

Sleepless in Ayala - Wonder Why ALI is stuck!

What's wrong with Ayala Land (ALI - P10.75)?

For the past few weeks, foreigners have been net sellers in Ayala Land. It seems that certain fund managers are unloading large blocks of ALI shares. This does not bode well for the overall market sentiment. As I have mentioned, for us to see the Phisix higher; we need to have a leader. I was looking at ALI to take the lead since the property sector is at the correct end of the cycle. This means that earnings surprises will likely come from property stocks. This is similar to what the telco sector did in 2003 – 2005, when PLDT (PHI – US$ 37.0) lead the market. ALI, as always is the proxy for the property sector. What is good for ALI is good for the sector and is a catalyst for the Phisix as well. So what is happening? Your guess is as good as mine or I am just being restless?

I have no exposure in ALI but I am overweight property stocks including Cebu Holdings (CHI - P1.86) – an ALI subsidiary.

Philex - to declassify

As expected, Philex Mining will declassify its A and B shares. Please check:

http://money.inq7.net/breakingnews/view_breakingnews.php?yyyy=2006&mon=03&dd=27&file=11

Please check my past post on Philex

http://bigbigtrade.blogspot.com/2006/03/me-bad-why-i-missed-out-on-philex.html

With this issue out of the way, investors can now focus on the fundamentals of Philex rather than speculating whether the shares will be declassified or not. However, i do believe that the declassification is a good move as this will increase the free float of the stock. Foreign investors will be more inclined to invest in the counter.

Philex is the blue-chip amongst the mining stocks. The company is expected to earn P2.0bn this year. This means that the stock is trading at roughly 4.0x EV/EBITDA. We should expect some upside in the coming months.

Money On the Table - My Portolio Summary 03/24

Stocks (Code) - % / Total
Empire East (ELI) - 15.9
Cebu Holdings (CHI) - 17.9
JG Summit (JGS) - 40.8
Republic Cement (RCM) -13.2
Kuok Philippine Prop. (KPP) - 6.8
OMICO (OM) - 5.3

Sold out my position in RLT; bought KPP.
Big movers - JGS and ELI.
Slowpokes - RCM. OM
Neutral - CHI

Overall, my portfolio is skewed towards the property sector.

Now they are talking: HSBC says P47, ING says P45

It seems that major foreign banks have upgraded their outlook on the Peso.

Please check out the following articles:

HSCB says Peso to reach P47
http://www.philstar.com/philstar/NEWS200603170706.htm

ING says Peso to reach P45
http://money.inq7.net/topstories/view_topstories.php?yyyy=2006&mon=03&dd=20&file=5

Me Bad - Why I missed out on Philex

Me bad. Really bad!

I missed out on Philex Mining (PX - P2.02) despite the fact that the charts are telling me to buy back my position.

I sold out all my holdings in PXB last February when it hit P2.32. My average selling price for my entire position is around P2.16. Not bad considering that my average cost is around P1.02. I turned neutral on the mining sector particularly on PXB due to the following:

1.) Gold price might take a while before it makes a new high. From how I see it, it will consolidate between US$ 535 - US$ 570. I am no expert in gold, but the chart is pointing to that argument. The key driver for PXB is the price of gold. With gold price not expected to make any significant move, I do believe that the share price of PXB will stay at current levels.

2.) There are speculations that Philex will declassify its shares. I believe they will. I am just waiting for that to happen before making my move.

3.) There are questions whether the government or the congress will repeal the Mining Act. I don't think they will but it will create some noise in the short term.

So why did the share price of PX move from P1.60 - P2.04? There are talks that Ivanhoe Mines is interested to acquire a stake. Should I believe the story? I guess the price speaks for itself. Morale of the story - always trust your charts!

Why I bought Philippine Realty - RLT

A lot of people were asking me why I bought Philippine Realty (RLT). Here are my reasons:

1.) RLT has been successful in negotiating its past due loans with their creditor banks. The company is under rehabilitation. This means that it has more leverage in forcing the banks to settle its loan through asset swap. In due time, most of its loans will be extinguished.

2.) Philex and RLT have common major shareholders. Since Philex is doing (very) well, I do believe that there will be a spillover effect on RLT. The major shareholders of RLT are now in a better position to re-capitalize the company.

3.) RLT is attractively priced at below P.30 per share. This should invite speculators to punt the stock.

How far will RLT go? I really don't know. Your guess is as good as mine. It is simply a speculative play for me.

Money On the Table - My Portolio Summary 03/17

Stocks (Code) - % / Total
Empire East (ELI) - 17.6
Cebu Holdings (CHI) - 19.2
JG Summit (JGS) - 38.5
Republic Cement (RCM) -13.2
Philippine Realty (RLT) - 5.9
OMICO (OM) - 5.5

Reduced holdings in RLT, increased position in CHI.

Overall, my portfolio is skewed towards the property sector.

Speculation As A Fine Art - Dickson Watts

Let me share some interesting excerpts from the book.

What is speculation? Speculation is a venture based upon calculation. Gambling is a venture without calculation.

What are the qualities essential to a speculator.

1.) Self Reliance. In other words, self-trust is the foundation of a successful speculation. A man cannot have another man's idea or body.

2.) Judgement. That equipoise, that nice adjustment of faculties one to the other, wich is called good judgement, is an essential to the speculator.

3.) Courage. That is, confidence to act on the decisions of the mind. Don't hesistate to act!!!!

4.) Prudence. The power of measuring the danger together with a certain alertness and watchfulness, is very important. It is all about risk management and being able to sleep well with your position.

5.) Piability. The ability to change an opinion. In other words, don't be stubborn!!! Things change and investment paradigm change as well. Everything is relative.
 
I find the qualities mentioned by Dickson Watts quite interesting. In my experience investing in the stock marekt, I can totally relate to what Mr. Watts is saying.

Most of my big losses are due to my lack of action. I "hoped" for the stock to go up when I could have gotten out alive and maintain my capital. There is no such thing as "hope" when it comes to investing. It is either you are "in" or "out" of the stock.

Most of my wrong analysis in rating a stock is due to my stubbornness to accept change. There is always such thing as a change in paradigm. What's cheap now may not look cheap at all. I always chastise analyst for saying that this stock is cheap at 5.0x PER!!!!! Valuations are relative and should not be taken at face value.

5 Must Read Books

Here are the 5 "must read" books for stock market investors:

1. How to Make Money in Stocks by William J. O'Niel - The book teaches investors how to device a winning system in good or bad times. I like the chapter on how to spot a "breakout". Most "5-bagger" stocks start with a breakout. The move implies that there is a definite change in the company's fundamentals and a new valuation paradigm applies.

2.) Reminiscensces of a Stock Operator by Edwin Lefevre - The book is about Jesse Livermore - a touted stock operator during the go-go days of the early 1900's. The author vividly narrates the insights of Jesse Livermore in trading the market. It all boils down to two basic things: price and volume. The book is a must read for traders who rely more on price movements rather than market fundamentals in buying stocks.

3.) Speculation as a Fine Art by Dickson Watts - The book is about the principles of speculation. According to Mr. Watts - "Speculation is a venture based upon calculation. Gambling is a venture without calculation."

4. One Up on Wall Street by Peter Lynch - The book is written by the legendary fund manager of Magelan Fund -Peter Lynch. He talks about how to spot "10-baggers" using common sense. He narrates how he invested GAP and Wal-Mart when both companies are still 10 store/1 state operations and held on to it and see them grow into a multi store/global operations. It all boils down to the ability of the company to replicate its business model.

5. The Intelligent Investor by Benjamin Graham - The book is the "bible" of Warren Buffet - the chairman of Berkshire Hataway. It teaches investors how to properly value stocks using basic metrics like return on equity, discounted cashflow etc.

Amongst the 5 books mentioned, the first 3 books are quite relevant to the local market. On the other hand, the other 2 books mentioned assumes an efficient market scenario which may not apply to the Philippine market.

The books are available at www.amazon.com

Money on the Table - My Portolio Summary

Below is the summary of my portfolio:


Stocks (Code) - % / Total
Empire East (ELI) - 16.2
Cebu Holdings (CHI) - 15.8
JG Summit (JGS) - 39.3
Republic Cement (RCM) -13.2
Philippine Realty (RLT) - 9.5
OMICO (OM) - 6.0

Peso at P48.0 - Here We Come!

I have been bullish on the Peso since the later part of 2005. The recent move of the Peso further "tested" and "confirmed" my view on the currency. Last week, at the height of the coup plot, the Peso tested P52.20. In a clear reversal move, the Peso gained back all its losses and at the same time closed at a 3 year high to end at P51.05 today. That shows you that the Peso is clearly on a bullish trend.

There are 3 arguments on why the Peso will move higher:

1.) Government will likely adjust its revenue targets this year. I expect that collections from e-VAT will likely surprise on the upside. I have talked to several business people and they told me that misreporting of sales to Bureau of Internal Revenue (BIR) is becoming harder with the new electronic procedure implemented by the agency.

2.) Peso risk premium is not justified. The Thai Baht and Peso are the usual comparables in the global currency basket. The Thai Baht is currently trading at Bt38.50 to US$ 1, this translates to a 32% premium versus the Peso. This sort of premium is not sustainable considering the economic gains that the country has achieved. I do believe a 20% risk premium is more defensible. This means that the Peso should be trading at P46.50 - P48.50 range.

3.) Positive dollar inflows from fund managers and OFW will continue. This means demand for Peso will continue to be strong in the coming months.

On the political front, investors are lauding the strong-arm tactics of GMA. It shows that the President is in control and it is unlikely that another major destabilization attempt will occur in the next 6 months.

Cebu Holdings (CHI - P1.78) : The Little Ayala

Cebu Holdings offers a proxy play to its parent - Ayala Land (ALI - P11.50). Cebu Holdings is the property subsidiary of Ayala Land that focuses on development projects in the southern Philippines.

Cebu Holdings currently trades at 1.0x Price to Book Value (PBV) while Ayala Land trades at 4.0x PBV. I do believe that the valuation disparity between the two affiliated companies will narrow in due time. My thinking is that the market will be willing to pay at least 2.0x PBV on Cebu Holdings as investors upgrade their outlook on Ayala Land. At those levels, Cebu Holdings should be trading at around P3.20 - P3.50.

Today, some 6.5m shares of Cebu Holdings were traded in the market. This is roughly 4x the average daily turnover of the stock. I think the move signifies that the stock has indeed broken out of its P1.52-P1.72 trading range and is poised to trade higher in the next few days.

Property Sector The New Leader

Enter the don - the market has a new king.

I remain confident that the index will likely move out of the 2,050 – 2,150 trading range and will attempt to trade within the 2,300 – 2,600 range in the next 6 months. Note that the Peso/Dollar rate is a leading indicator for the stock market. Despite the current political situation, the Peso reached a 3 ½ year high to close at P51.36. This means that investors voted with their money by pouring in their dollars into the local market. Investors want stability and it seems that the strong arm tactics of GMA is getting their seal of approval.

So what sector will lead? My bet is that smart money will flow into the property sector. So enter the new king – Ayala Land (ALI – P11.50). ALI is the proxy for the property sector. In fact, the market has played little attention to the fact the share price of ALI has increased by 64% since July 2005.

Why am I bullish on the sector? First, property prices have remained where it was 10 years ago and roughly 70% off its peak in 1997. In Makati CBD, lot sells for P120,000.0 per sqm. or roughly US$2,300.0 based on P51.5 = US$1.0 exchange rate. In 1997, lots in the area cost around P400,000.0 per sqm. or roughly $15,000.0 based on P26.5 = US$1 exchange rate. It is a matter of time before property prices started creeping up. Second, property companies are the biggest beneficiaries of the country’s OFW sector. It is estimated that OFWs invested close to US$1.0 billion in new housing projects in the past 2 years. Thus, the sector offers an indirect play in the OFW economy. Third, the sector is cash rich. From a net debt position, most property companies have moved to net cash position. This gives them enough war chest to move ahead.

So, what will happen to the old king? Its time out for now for PLDT (TEL P1,780.0) as market seers – and even their CEO admitted during the analyst briefing that earnings growth will likely slow down in 2006. This should be another boost to property stocks as money will likely switch out of the telecommunications sector.

Why The Big Big Trade

Big Big Trade is all about the next big move in the Philippine stock market. I have been involved in the market for almost 10 years. I have seen the Philippine Stock Exchange Index (PSE Index) move from 3,400 to 1,000. In other words, I have seen the best and worst of times. I have personally experienced the swings and I must tell you that it is one hell of a wild ride. I do hope to share my investment insights and hopefully guide investors on where to make their next bet.

I must warn you though that investing is not an exact discipline. Human emotions play a big part in the overall equation. I can be right today and wrong tomorrow. But in the end, it is all about managing your risk. Always remember, run your winners and cut your loses. Quoting from Dickson Watts, a famous speculator in the early 1900. He says: “Speculation is a venture based upon calculation. Gambling is a venture without calculation”.