Blue (Cheap)!

The roaring PSEi has lifted prices to levels not seen in 9 years. Despite the upsurge, the PSEi is still trading at reasonable valuations. Based on a forward Price Earnings Ratio (PER), the market is trading at 14x PER to 2007 earnings. The valuation excludes Ayala Land (ALI – P15.0) and Meralco (MERB – P33.0).

However, there are some big-cap counters that merit a second look. So lets review some blue (cheap) counters. These are essentially big-caps that are still trading at discount multiples.

Petron – (PCOR – P4.15)
The price of Petron still reflects the risk associated with the recent oil spill in Guimaras. I do believe that this provides investors an excellent buying opportunity. Petron is not off the hook as far as Guimaras is concerned. However, the potential cost to the company is overblown. The company is insured against oil spill. We also have to take into account that a potential litigation under Philippine settings will take at least 20 years to resolve. So in the end, this incident will just be a mere footnote in the overall picture.

We should see what happened to ABS-CBN Broadcasting (ABSP – P20.50) and gauge how the market can price in these “one-off” incidents. The share price of ABS-CBN has doubled after the ULTRA stampede incident that happened last January. Two weeks ago, the Department of Justice (DOJ) recommended filling of criminal complaints against ABS-CBN. The market simply shrugged of the news and push ABS-CBN to new highs.

Petron trades at 6.5x PER to 12/2007 earnings. Normally, Petron trades at a 30% discount to the market. Based on this assumption, Petron should be trading at 10x PER to 12/2007 earnings equivalent to P6.50/share. This represents a 56% upside from current levels. In this buoyant market, the potential return is definitely worth a second look.

Manila Water (MWC – P9.20)
MWC remains to be one of the cheapest blue chip counters in the market despite the 50% run-up in share price that we saw this year. MWC trades at 9.0x PER to 12/2007 earnings. I do not think that MWC should trade at a discount to the market considering that the company is poised to deliver 20% average earnings growth in the next 2 years. MWC should even be priced above the market. This means that MWC should be trading at P14.0 and not P9.20.

MWC is a unique utility play since it has both “growth” and “stability” in its earnings. You do not normally associate growth with utility counters. Utility stocks are usually “boring” and “steady” earners. In the case of MWC, it essentially relies on two factors - new customers and reduction in non-revenue water to grow its earnings. On both counts MWC continues to deliver. Total connections as of 1H06 grew by 13% generating while non-revenue water fell to 30.9% from 35%.

The situation of MWC right now is akin to MERALCO (MERB – P33.0) in early 90’s. During the said period, MERALCO aggressively invested to upgrade its infrastructure in order to get new customers and reduce its systems loss. Having delivered on both fronts; we saw the share price of MERALCO soar to as high as P250 from its offering price of P10.0/share in 1992.

A Lot of Bull!

There is a lot of “bull” going around the market lately.

Quiet bull. Baby bull. Silent bull. Cautious bull. These are some of the bull tales that I heard in the past few weeks from market insiders. The good thing about these bull tales is that not everyone is convinced. These tales are mere “whispers” from key market movers. The public is still oblivious on what’s going on in the stock market despite the fact that the PSEi has moved form 1,200 to 2,600. A quiet run-up would give the market further room to expand. This will induce new funds to flow into equities.

I continue to receive emails asking when to sell the market. I guess, there is still no reason to sell the market. For now, the only reason to sell is to take profits. However, it is a weak argument considering that the odds favor the PSEi reaching new highs. Again, to quote Jessie Livermore: “In a bull market, it is the sitting that counts.” So sit tight and run your profits!

The only time to sell is when the ”bull” becomes a “bullheaded bull”. The Philippine Daily Inquirer (PDI) has not published any headline/front-page stories on the market. So on that note, we are still safe. Personally, I have not received any calls from long-lost friends asking me what stock to buy. Thus, the “housewife/doctor” theory has not been triggered yet.

Bank of P.I. (BPI – P58.50) + PSEi 2,617
Two things caught my attention last Friday. BPI rose 4.5% whilst the PSEi closed above 2,600.0 for the first time in 7 years. From experience, a strong move by BPI would normally signal a turnaround on either direction. If BPI continues its run on Monday, expect foreign buying to pour into the market. Note that at these levels, BPI is already trading nears its pre-1997 level prices. Again, these two milestones have gone unnoticed. However, these are key impetus in further re-rating of the market. For a bull-run to mature we need the banking and property sectors to lead the market. With BPI already off the blocks, it is a matter of time before other stocks chase the tape.

Republic Cement (RCM – P2.12); what now?
One of the best calls I made is on RCM. Since my post last Oct. 04, the stock has risen by 51% to P2.12. I do believe that it has more room to go. As mentioned, this is a value creating market. If “weaker” stocks like House of Investments (HI – P1.90), A. Brown (BRN – P1.58) have gone up significantly, there is no reason for stocks with very strong fundamentals not to trade nears its real value.

RCM has a market value of P15.26bn whilst Holcim (HLCM – P5.80) is valued at P37.0bn. In between these two identical stocks is P22bn in market capitalization. This means that for RCM to trade at par with HLCM, it should be priced at P5.20/share. This is a glaring valuation discrepancy that the market will have to correct soon.

Small (Cap) Wonders – Part 2, Don’t Be Afraid!

Last week I wrote about why small is beautiful. Please read - http://bigbigtrade.blogspot.com/2006/10/small-cap-wonders-why-small-is.html .

What is good for BPC/DGTL is good for small-caps
I am glad to see the small-caps that I recommended have moved up except for Ionics – (ION – P2.02). I guess it is obvious that the play will shift to these counters. Liquidity flow to these counters is very encouraging. Based on my estimate, roughly 30% of the average daily value turnover of the market has shifter to small-caps. What is also obvious is that Benpres – (BPC – P1.46) and Digitel (DGTL – P1.50) have emerged as the small cap leaders. Note that for the past weeks, Benpres never traded below US$1.0m per day.

As a gauge, investors have to closely watch the movement of Benpres and Digitel in deciding when to unload their small-cap holdings. However, I do believe that both stocks still have a lot of room to move. So, the play is certainly not yet over.

Don’t be afraid
Don’t be afraid. Small-caps are generally more volatile than the other counters. So there will be some “whip-saws” along the way but I firmly believe that prices are still on an uptrend. If you are a good trader, you can certainly trade the ranges. However, if you are willing to wait, I guess sitting tight might be the best thing to do.

Also, I have seen certain cautiousness with the way the prices of small-caps are behaving. I received several emails asking me when to sell. This is good; since it suggests that the exuberance factor has not yet been priced in. Normally, I would sell when there is excessive optimism.

Value creating market
It is also quite clear that we are in a value creating market. This means that money flow will continue to seek undervalued stocks. As I mentioned earlier, a lot of counters are still priced at “crisis” valuation. This will not hold for long. Eventually, stocks that have weathered the crisis and have 100% chance of survival will trade at its proper value. I don’t think the liquidity flow that we are seeing right now will dry-up soon. If at all, we should see further improvement. Note that in 1996, the average value turnover was at P2.6bn per day equivalent to US$100m based on P26.0 : US$1.0 exchange rate. For us to approximate that amount, we should be doing P5.0bn. This implies that liquidity is still has room to grow.

Finally, my take on DGTL and ION
Two stocks that have propped up from my users are ION and DGTL.

For ION, I guess it is a matter of time before we see the stock trade back to its recent high of P2.80. I have confidence in the stock. I do believe that it has indeed weathered the crisis and has a 100% chance of survival. From a salvage value scenario, investors should look at ION on a continuing basis. I cannot speculate how the market will value ION. However, based on my own computation, the stock is worth P4.20 per share. Please check my past post on ION - http://bigbigtrade.blogspot.com/2006/06/ionics-ion-p216-looks-to-turnaround.html

On DGTL, I really do not like the stock simply because the fundamentals do not add up. I guess it will take a lot more resources to take market-share away for Smart, Talk+Text and Globe. What DGTL can offer, the three other networks can easily match or even do better. Note that communication has already been commoditized. The sector is faced with declining revenue per unit environment. So DGTL is faced with a tougher market condition moving forward. As a fringe player, I do not see how DGTL can create a ripple.

Having said that, it does not mean that the share price of DGTL will not go up. It is obviously on an uptrend. From the grapevine, there are talks that a pending deal is about to be forged and the whisper price is P2.50/share. Heck –in this market; there are a lot more stocks that can do better and will make you sleep better at night. So why bother.

Bull run … period!

To quote Jessie Livermore: “In a bull market, it’s the sitting that counts”.

I received a lot of emails from my readers asking when to sell their stocks since most of their portfolios are sitting on hefty profits. Under current market conditions, patience is definitely a virtue. You rather be “long” than out of “stocks”. There is no argument that we are in a bull run. So don’t be left behind and go for the big gains. Forget about trading the spreads. My belief is stocks will continue to trend higher with all the elements of a major run-up coming into fore. My near term target of 2,725 is a given.

What is interesting is that local money continues to pour into the market. This is the missing link in the earlier run-ups. Note that the rise of the PSEi (PSE – 2,561) from 1,100 in 2003 to its current levels was driven mainly by foreign funds. During that period, we saw index heavyweights such as PLDT (TEL – P2,225), Petron (PCOR – P4.10) and Ayala Land –(ALI – P14.0) rose by at least 300%. Local money plus foreign buying is a potent mix in driving a bull run.

To read more about Jessie Livermore, please go to http://www.marketthoughts.com/jesse_livermore.html

Small (Cap) Wonders – Why Small is Beautiful?

For the past few weeks, we have seen a steady accumulation of small-caps – stocks with market value of less than US$150m. I do believe that this is a sign that local money is flowing back into the market. Locals – or “tsupitero” in the vernacular would usually trade stocks that are priced below P2.0 per share. The timing is perfect and I do think that investors should ride the tide and start investing in these stocks.

So why am I positive on small caps? Here are my arguments:

1.) Big-caps and second liner stocks have significantly risen in value for the past 3 years. Thus, small-caps look cheap in terms of relative price appreciation. Note that proxy stocks like PLDT (TEL – US$43.90), Petron (PCOR – P4.05) and Megaworld (MEG – P1.84) rose at least 5-folds during the said period.

2.) Profits from the big caps and second liner stocks will likely flow to small-caps. This has always been the pattern. After small caps, my next bet is for investors to chase the “basura” or garbage stocks.

3.) A lot of small caps are still trading at “crisis” prices. This means that share prices still reflect bankruptcy risks that should already be out of the equation.

So what stocks to buy? Here is the list of my small cap wonders:

1.) Kuok Philippine Properties (KPP – P0.28) – KPP is an asset play that investors have ignored. Its 40% stake in Edsa Property Holdings (EPHI – P1.24) is worth roughly P3.0bn or P.88 per share. Excluding its other liabilities, KPP should be trading at P.60 per share.

2.) Benpres (BPC – P1.28) – BPC is definitely a recovery play. First, the P/$ rate is expected to appreciate to P48 to US$1.0. This should add at least P.40/share to its current NAV estimate of P1.24/share. Second, BPC is looking to sell its 49% stake in First Philippine Infrastructure Dev’t Corp. (FPIDC). The company is expected to realize at least P5bn gain from the deal.

Please check my past post on BPC - http://bigbigtrade.blogspot.com/2006/07/benpres-bpc-p112-bet-whats-brewing-sir.html

3.) Republic Cement (RCM – P1.48) – I have said enough about the stock. Please check my past post: http://bigbigtrade.blogspot.com/2006/05/why-i-bought-republic-cement-rcm-p124.html . Simply put, it’s a matter time before this stock trades at par with Holcim (HLCM – P4.90).

4.) Ionics (ION – P1.98) – Please check my past post: http://bigbigtrade.blogspot.com/2006/06/ionics-ion-p216-looks-to-turnaround.html. The stock is a turnaround story waiting to be discovered.