Some questions from my users
Question - Sir, I have the highest regard in your views and analysis on certain stocks. May I ask you about your outlook on stock market in the first quarter of 2007 and if you have a list of stocks, companies, and industries to watch this year? Wishing you a prosperous 2007 full of great luck, blessings and good health. From Rainman
Investors should overweight utility counters. Please read my entry last week http://bigbigtrade.blogspot.com/2006/12/key-theme-for-2007-buy-utility-stocks.html . Amongst the utility counters, my number one choice is Meralco (MERB – P59.50), followed by Manila Water (MWC – P9.20) and PNOC Energy Dev’t (EDC – P4.50).
Meralco is indeed a turnaround story. Even with the recent price run-up, the stock is trading at mere 7.4x PER. So, a price target of P80.0 or 10x PER is defensible. Longer term, I do believe that Meralco should be trading close to P100.0. Added to this, there is a rumored M&A play in MERALCO. The Lopez’s have expressed their willingness to sell out of Meralco at the right price. I guess the writings are on the wall.
Manila Water has consistently been in my recommended list since early 2006, when the stock was trading at P6.30. I guess, the recent sell-down is a perfect opportunity to add to your position. MWC offers both growth and stability. Seldom do you see these two factors come together in a utility concern. Normally utility counters provide stable earnings picture. This is not the case for MWC. For 2007, the company is expected to generate healthy top-line revenue growth excluding rate hikes. This means that MWC still has a huge untapped market to grow its revenue base. The approved 13% rate hike is an added bonus. In due time, the market should pay a premium on MWC based on its quality of earnings. Easily, MWC is a P12 stock.
As for EDC, I guess the price movement speaks for itself. For a US$300m IPO to jump more than 50% tells you the level of institutional demand for the stock. Most likely, more buying orders will come in. EDC is very similar to the Petron (PCOR – P4.10) IPO in 1995. From its initial offering price of P9.0, Petron rose to as high as P25.0. Mostl likely EDC will follow the same track.
Question – Sir Jack, what are your criteria in choosing a sector or a stock? I notice that you have very different calls on the market. Btw, it seems that you are not been bullish on the property stocks. – From theblackmagic
My key criterion for liking a sector (or a stock) is if there is a significant change in paradigm. For 2007, I like the utility sector since the government has shifted from “anti-utility” to “pro-utility” policy in regulating the sector. With the move, we should expect a re-rating in the coming months. Note that the Price Earnings Ratio (PER) is an indirect pricing for risk. Lower risk translates to higher PER and vice versa.
For 2006, my best picks were RCBC (RCB – P24.50) and Republic Cement (RCM – P4.20).
For RCBC, my argument then was that the company has moved from being “inadequately capitalized” to “adequately capitalized” after the successful P2.0bn “Tier 2 equity” offering. Thus we saw the valuation moved from 0.8x Price to Book (P/BV) to 1.6x PBV.
On the other hand, RCM moved from being a “distressed” cement company to a “cash flow positive” cement company. The change in paradigm saw the stock zoom from P0.85 to P4.20 in less than a year.
Finally, I am not too keen on the property sector. The series of equity calls from Megaworld (MEG – P1.82) and Filinvest Land (P1.66) indicate that the sector is still in the negative investment cycle. This means that property companies are running on negative cash flows and thus, they have to resort to borrowings and equity calls. Note that these fund raising activities have a negative impact on the value of the existing shares. It dilutes the equity value.
So, until the sector starts showing signs of turning around its cash flow position, returns will likely lag the rest of the market. Between 1994-1996, property companies outperformed the market simply because they are generating positive cash flow. Recall that during that time, property buyers were scrambling to purchase properties upfront or even pre-pay the units during the pre-selling phase. Unfortunately, this is not happening right now.
Investors should overweight utility counters. Please read my entry last week http://bigbigtrade.blogspot.com/2006/12/key-theme-for-2007-buy-utility-stocks.html . Amongst the utility counters, my number one choice is Meralco (MERB – P59.50), followed by Manila Water (MWC – P9.20) and PNOC Energy Dev’t (EDC – P4.50).
Meralco is indeed a turnaround story. Even with the recent price run-up, the stock is trading at mere 7.4x PER. So, a price target of P80.0 or 10x PER is defensible. Longer term, I do believe that Meralco should be trading close to P100.0. Added to this, there is a rumored M&A play in MERALCO. The Lopez’s have expressed their willingness to sell out of Meralco at the right price. I guess the writings are on the wall.
Manila Water has consistently been in my recommended list since early 2006, when the stock was trading at P6.30. I guess, the recent sell-down is a perfect opportunity to add to your position. MWC offers both growth and stability. Seldom do you see these two factors come together in a utility concern. Normally utility counters provide stable earnings picture. This is not the case for MWC. For 2007, the company is expected to generate healthy top-line revenue growth excluding rate hikes. This means that MWC still has a huge untapped market to grow its revenue base. The approved 13% rate hike is an added bonus. In due time, the market should pay a premium on MWC based on its quality of earnings. Easily, MWC is a P12 stock.
As for EDC, I guess the price movement speaks for itself. For a US$300m IPO to jump more than 50% tells you the level of institutional demand for the stock. Most likely, more buying orders will come in. EDC is very similar to the Petron (PCOR – P4.10) IPO in 1995. From its initial offering price of P9.0, Petron rose to as high as P25.0. Mostl likely EDC will follow the same track.
Question – Sir Jack, what are your criteria in choosing a sector or a stock? I notice that you have very different calls on the market. Btw, it seems that you are not been bullish on the property stocks. – From theblackmagic
My key criterion for liking a sector (or a stock) is if there is a significant change in paradigm. For 2007, I like the utility sector since the government has shifted from “anti-utility” to “pro-utility” policy in regulating the sector. With the move, we should expect a re-rating in the coming months. Note that the Price Earnings Ratio (PER) is an indirect pricing for risk. Lower risk translates to higher PER and vice versa.
For 2006, my best picks were RCBC (RCB – P24.50) and Republic Cement (RCM – P4.20).
For RCBC, my argument then was that the company has moved from being “inadequately capitalized” to “adequately capitalized” after the successful P2.0bn “Tier 2 equity” offering. Thus we saw the valuation moved from 0.8x Price to Book (P/BV) to 1.6x PBV.
On the other hand, RCM moved from being a “distressed” cement company to a “cash flow positive” cement company. The change in paradigm saw the stock zoom from P0.85 to P4.20 in less than a year.
Finally, I am not too keen on the property sector. The series of equity calls from Megaworld (MEG – P1.82) and Filinvest Land (P1.66) indicate that the sector is still in the negative investment cycle. This means that property companies are running on negative cash flows and thus, they have to resort to borrowings and equity calls. Note that these fund raising activities have a negative impact on the value of the existing shares. It dilutes the equity value.
So, until the sector starts showing signs of turning around its cash flow position, returns will likely lag the rest of the market. Between 1994-1996, property companies outperformed the market simply because they are generating positive cash flow. Recall that during that time, property buyers were scrambling to purchase properties upfront or even pre-pay the units during the pre-selling phase. Unfortunately, this is not happening right now.
posted by jack galt at
11:36 PM
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