One year of Big Big!

Time flies!

Little did I notice that it has been over a year since I started blogging in Big Big Trade. I wrote my first entry on March 1, 2006 about the property sector, please read

Property Sector

At that time the PSEi was trading at around 2,050 - 2,250 range. To date, I have written over a hundred entries and gotten numerous feedback (including criticisms) from my readers. The PSEi is currently trading at around 3,000 - 3,200 levels. Honestly, I am amazed with how fast I can convert thoughts to action ideas. I guess, I have my readers to thank, for inspiring me to do so.

Big big on the map.

There are several notable calls that I made and some "duds" along the way. Stocks that put Big Big Trade on the map are Philippine Stock Exchange (PSE - P650.0), Republic Cement (RCM - 5.80) and JG Summit (JGS - P12.75). These 3 stocks have returned an average of 350% since March 2006 compared to the 58% rise in the PSEi. As always, we have the market to thank for - and not ourselves, for bringing the stocks to its right value. I guess its not being right all the time but being right most of the time that counts.

One of the most common question from my readers is my investment philosophy.

Essentially, my investment principle is to find value. I usually look for stocks that are trading way below its "real" value, sit on it and harvest the returns when the market properly price the stock. As always, my favorite philosophy is to buy when the writings are on the wall rather than play hero. As my mentor would always remind me, " In the stock market, heroes are guillotined". I am not too worried about short term price swings for as long as I am confident about the value of the stock. Eventually, the market will finds its way to pay the right price for the stock. As for risk management, I always stick to my 25%-50%-25% rule. Instead of limiting my exposure to certain number of stocks, my strategy is to group the stocks into three baskets - patient, long term and speculative bets. Please read

Rule of Three

So what's up for the market in the coming months. I believe that the PSEi will trade at new highs within the year. Here's why:

1.) Mismatch in income growth and market capitalization. Since 1997, the country's GDP has expanded from US$62.0bn to around US$96.0bn in 2006. The close to 50% expansion in the country's GDP has not yet been captured by market. In dollar terms the PSEi is still trading 54% below its 1997 highs. Eventually, the market has to correct this discrepancy. So, seeing the PSEi rise further from current levels is very defensible. Assuming the market tracks the 1997 highs - in peso terms, this should bring the PSEi to 6,250. I am not saying that this will happen in the next 24 months. Long term - say 3 to 5 years, this can be the psychological target that the market is looking at.

2.) Price Earnings Ratio (PER) expansion. Moving forward, I expect an overall re-rating of the market. The market is currently trading at 15x PER. Excluding Ayala Land (ALI - P15.75) and SM Prime (SMPH - P11.0), the market is actually trading at mere 11x PER to 12/07 earnings. The key drivers to PER are earnings, earnings growth and discount rates. Higher earnings growth and lower discount rate will eventually lead to higher PER valuation. I do believe that discount rates on Philippine assets will go down to around 8% from the current 12% benchmark. This will likely expand PER to 15x - 16x. At those levels, the PSEi should be trading at around 3,800. Even with the recent market run-up, stalwarts like PLDT, Meralco, PNOC - EDC and Petron are trading at mere 10x-11x PER. Note that in 1997, the market was trading at a forward PER of 20x. So I guess, the PER target is doable based on past experience.

As we close the first quarter of 2007, i wish everyone a Big Big year ahead.

Quote for the day: "In the short run, the market is a voting machine. In the long run, the market is weighting scale"

Benjamin Graham

Turnaround saga - The C&P Homes (P2.90) story

Good stories begin with a nice prologue.

A few weeks ago, I mentioned that C&P Homes is one restructuring story that the market has ignored. It's share price has since rallied to around P3.05 despite the recent market sell-down. However, I still believe that the story will not end at these levels. There will be more chapters to the C&P Homes saga. The good thing is, the market has not factored these in yet and thus it gives us another chance to accumulate the stock. Here's how I see the chapters will unfold:

Rehabilitation. Last week, C&P Homes announced that 90% of its Floating Rate Currency Rates Notes (FRCN) creditors have accepted the terms of its debt buy-back offer. A total of US$126.0m worth of debt were bought back at US$47.0m plus 750.0m new C&P Homes shares. Effectively, the creditors were paid C&P Homes shares valued at P8.00. The exercise extinguished US$79.0m worth of debt. This should translate to an incremental P0.80/share gain in its book value. On top of the P3,600.0m debt that was swapped for equity last year, the estimated book value of C&P Homes is equivalent to P1.63 per share.

My investment premise is to buy when the writings are (clearly) on the wall. This minimizes a lot of risk. If the FRCN creditors are willing to value C&P Homes shares at P8.00, there is every reason to believe that the value will one day be achieved. Note that in 2001, PLDT (TEL - P2,360.0), offered to swap the debt of Piltel (PLTL - P7.00) at P1,775.0 per PLDT share. At that time PLDT was trading at around P500.0. So I guess, the creditors are usually in the know of whats happening in the company. I don't think they are "stupid" to accept a "no-win situation" deal.

Recapitalization. The next step is to see how the recapitalization chapter unfolds. C&P Homes announced that it will launch P5.0bn worth of new projects in the next 2 years. The company has negligible cash-flows at this stage, I am pretty sure a fund raising activity is in the works. How it will be done remains a mystery. However, its clear that this will be done.

Assuming, my premise is correct, I do not think that an offering will be done at this point. I guess the values are just too low at these levels for any offering to materialize. This brings me to my next chapter - revaluation.

In 1997, C&P Homes traded at an adjusted price of P160.0 per share. Its market capitalization then was around P73.7bn, roughly equivalent to its Net Asset Value (NAV). Taking into account the 90%, dilution from the debt reduction exercise, the P160 is (now) equivalent to P16.0.

So at P2.90, we are essentially paying a "mere" 18% of its 1997 NAV. Since property values have bottomed at 40-50% below the 1997 prices, we can safely assume that its current NAV is around P7.20 - P8.00 per share. So, in effect, we are still paying a huge discount to its adjusted NAV.

So, how far will the share price of C&P Homes go? That's for the market to write the succeeding chapters. However, whats clear is that there is little risk in investing in the company at this stage. Who knows, maybe C&P Homes will follow the Benpres (BPC - P3.55) storyline. If that happens, the creditors will be laughing all the way to the bank.

Buffet and Soros

Here are some excerpts from the book "The Winning Investment Habits of Warrent Buffet and George Soros", written by Mark Tier.


Buffet and Soros do not diversify. When they buy, they buy as much as they can.

They're not focused on the profits they expect to make. Going in, they're not investing for the money at all.

According to Buffet "It is not risky to buy securities at a fraction of what they are worth."

Soros says "To survive in the financial markets sometimes means beating a hasty retreat."

I highly recommend the book. The author did a good job in presenting the similarities between Buffet and Soros despite their contrasting investment style. We should all learn from the "Masters".

Quote for the day: "Survive first and make money forward"

George Soros

Some questions from my readers

Q: Thank you for your valuable insights, sir jack. In the light of the recent market dive, are there any changes on your views regarding the property sector? How long will it take for the three stocks (LND – P0.84, SMDC – P3.85 & CMP – P2.50) you reviewed to attain the price targets? -cocoy71@ xxx

A: The fundamentals of the property sector remain intact. I continue to believe that we are just seeing the "beginning" of the property bull-run.

As for stock prices, I guess we just have to wait a little bit longer. Stock market fundamentals have changed. It might take awhile for the market to digest the selling pressure that we saw this week.

Unfortunately, I cannot predict the exact time line as to when the stocks (that I mentioned) will attain the price targets. However, as always, my investment philosophy is to buy stocks with limited downside risk. LND, SMDC and CMP are all trading below their book value (BV) and Net Asset Value (NAV). Considering that property values have not moved for the past 10 years - in dollar terms it is still down by 75%, the odds are, asset values will increase in the coming years.

Q: How do I play the market in the coming weeks? – mjoy@xxxx

Play it safe. Let me quote Investor Business Daily (www.investors.com):

“Throughout the past few days, we’ve highlighted strategies for coping with the market’s correction. Cut losses from initial buy prices quickly and sell your laggard stocks. Selling weaker stocks should naturally help you raise cash and protect yourself against the market’s choppy waters.

Don’t even consider buying stocks until you see the market hit bottom and stage a follow-through day. Even then, don’t buy until leading stocks break out of sound basing patterns.”

In my case, I have sold out all my speculative bets and reduced my holdings in my long-term portfolio. I have kept my patient bets intact. Please read
Rule of three

Q: What’s your view on Philippine Stock Exchange (PSE – P740.0) after the recent market sell-down? inqui@xxx

A: PSE is part of my “patient money” portfolio. Its share price has performed beyond my expectations. However, I continue to remain bullish on the stock and will hold it for the long haul.

As mentioned, the paradigm has changed. The recent market swoon further reinforced my belief. Here’s why:

1.) Average value turnover has increased to P4.0bn per day compared to P1.07bn last January’06.

2.) Last February 28 - during the market panic, turnover reached a record high of P12.0bn. This shows that liquidity will continue to flow into the market, despite the recent sell-down.

3.) There are more IPOs and M&A deals in the pipeline. Last week the PSE approved the merger of Banco de Oro (BDO – P55.00) and Equitable PCI Bank (EPCI – P100.0). Based on my estimate, the deal alone netted PSE close to P50m in listing fees.

4.) Investing is becoming more global. This is positive for the exchange. Fund managers can no longer ignore the Philippine market.

I maintain that PSE can easily make P500-600m in net income this year. For 1Q07, I expect PSE to report P150m in net income. This is 3x what it made in 1Q06.

Note that earnings growth is the key driver for valuation. If we expect the exchange to grow 100% this year, there is certainly more upside to its valuation. PSE is currently trading at about 18.5x PER. It is one of the cheapest in the region.

Quote for the day: "Act what you think, do what you think. Trading is just a game."

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