Big Big Trade

Cory + Erap = Power Power Fatigue

noreply@blogger.com (jack galt) — Sat, 01 Mar 2008 14:32:00 +0000

I grew up admiring Pres. Cory Aquino. I was awed by People Power I when I was a kid. I remember those yellow headbands and shirts worn by my sisters during that time. I was too young to know what was going on at that time. All I knew was a housewife drove out an evil person from Malacanang and became the country's president.

I was part of People Power II, when Cory and Cardinal Sin again asked people to troop to EDSA to ask for the resignation of Pres. Erap. It was another glorious moment for the Philippines. Erap resigned and Gloria Arroyo became the president. It shows the magic of people power.

Why is there people power fatigue then? I guess, with Cory and Erap leading the interfaith rally last Friday sums it all up.

I cannot understand why Cory has to stoop down to the level of Erap. I cannot imagine why a God-fearing and incorruptible Cory would share the stage with a convicted grafter and a womanizing ex-president. Let's be straight about it. A thief cannot ask another thief not to seal. The scene speaks for itself. It speaks a lot about compromise and transactional politics. Cory represents the oligarch while Erap represents the "masa". It shows that politicians are willing to compromise principles for the sake of power. So, in the end, it is all about power grab.

I guess, we should put people power in context. Cory has only herself to blame. People are wise enough to see the motives behind their moves. Until a genuine people power is put in place, there is no choice but for the protagonist to slug it out in 2010.

Unfortunately, while all these things are happening, it is the country that is suffering. In the end, we just have to accept that we are mere pawns in this chess game.

It's never too late to buy a stock. It's never too late to sell a stock.

noreply@blogger.com (jack galt) — Thu, 28 Feb 2008 04:36:00 +0000

Turtle Traders

Writings on the Wall: Rate Cut + Meralco

noreply@blogger.com (jack galt) — Wed, 05 Dec 2007 11:19:00 +0000

Buy when the writings are on the wall.

That's the best advice my mentor gave me while I am still a budding analyst learning my craft. As always, the best time to buy is when the writings are on the wall. No amount of technical or fundamental analysis can beat this advice.

Two things have emerged, the US Federal Reserve (US FED) is bent on cutting rates to prevent the US economy from slipping into a recession and the movement of Meralco (MER). I see these events as "triggers" in going back to the market.

Last week, US Fed Vice Chairman Donald Kohn said that policy-makers must be "flexible" and "pragmatic". This triggered a 331 points rise in Dow Jones Industrial Average as Wall St. see this as a signal that the US FED will cut rates when it meet on Dec. 11. Already, the futures market is pricing in a 100% chance that the US Fed will cut rates by 25 basis points and a 50% chance that it will cut rates by 50 basis points.

However, the surprise will likely come from a concerted effort by central banks to simultaneously cut rates in order to shore up the US dollar. More than the looming US recession, the weak dollar is creating havoc in the financial markets. As they say, what goes around, comes around. Previously, it was the US FED that acted as the savior for Japanese Yen and Euro.

In 1998, then Treasury Secretary Robert Rubin initiated a US$2.0bn purchase of Japanese Yen to prevent the Yen from falling below Y150.0 to US$1.0. The move stabilized the currency markets and brought the Yen back to Y135.0 to US$1.0 within days. Interestingly, the Japanese banking system was reeling from a US$600bn bad debt that was accumulated during the go-go years of the late 80's. Please read Can This Yen Be Saved?

In 2000, the US Fed and the Bank of Japan (BOJ) stepped in to buy Euros in order to shore up the currency. At that time, the Euro fell by almost 25% to US$0.85 to 1 Euro from its opening rate of 1.16 Euro to US$1.0 in 1999. Since then, the value of Euro has almost doubled to 1.48 Euro to US$1.0 Please read Euro Crisis

In the local market, I guess the movement of Meralco (MER-P82.50) is a sign of things to come. What's good for Meralco is good for the market. From its low of P68.0 last week, the stock has rallied by almost 22.0%. Meralco, is a bell-weather stock. The move tells us that money will be flowing to the utility/power sector. Two weeks ago, the Dept. of Finance (DOF) sold the 60% stake of the government in PNOC-EDC (EDC - P7.00) for P58.0bn. The winning bidder paid P9.75 per share, effectively paying a 40% premium over the market price of EDC. Next week, the government will bid out the concession of National Transmission Co. (Transco). Proceeds from the sale is expected to reach US$3.0bn. So from the looks of it, utility stocks will likely outperform the market. As always, go where the money is.

The bullish case for Meralco is defensible. Last week, Finance Secretary Margarito Teves indicated that the government is bidding out its combined 29.0% stake in Meralco early next year. Meralco is currently trading at 12.0x PER to 12/08 earnings. On the other hand, EDC, was sold at 18.0x PER to 12/08 earnings. Comparatively, Meralco should be priced within the same valuation range. This should put the indicative selling price of Meralco at around P102.0-115.0 per share.

If my assumptions are correct and the market indeed bottomed out at 3,400 levels, then there is a strong chance that the PSEi will make new highs by 1Q08. Note that the PSEi managed to establish higher lows versus the 2,800 (low) that it reached last August. So how high will the market run? Again, will just have to watch for the writings on the wall .....

For comments, you can send me an email at jack.galt888@gmail.com

Quote for the day: "Managing risk is an art in itself"

noreply@blogger.com (jack galt) — Tue, 04 Dec 2007 10:04:00 +0000

David Harding, Managing Director, Winton Capital Management

Random thoughts: Gold at 28-year high, Peso at P43.20, PSE at P1,300; Asian Godfathers

noreply@blogger.com (jack galt) — Fri, 09 Nov 2007 09:24:00 +0000

Gold gold gold

Gold surged to 28-year high to close at US$831.0. The slumping dollar coupled with renewed credit concern triggered by the US sub-prime crisis prompted investors to bid-up the price of gold. Last September, I wrote about the possibility of gold hitting US$1,000.0, please read: Gold at US$1,000

On a contrary view, I think it is prudent to take some money off the table. I guess, there is too much bullishness right now on gold. Everyone is talking about it. On a risk/reward basis, the trek to US$1,000 represents a 20% upside from current levels. To my mind, the big gains may have already been made.

Peso peso peso

Peso closed at 7-year high to reach P43.22 to US$1.0. The break below P44.0 confirmed the long-term uptrend of the the Peso. Most likely, we will see the Peso at P40.0 to US$1.0 by year-end.

The situation right now is an interesting turnaround of the Asian currency crisis that happened 10 years ago. Investors are now shifting out of US assets and moving into other better yielding currencies. Note, that the Asian currency crisis triggered the longest bull-run in US equities market that saw the Dow Jones rose from 3,000 to 11,500 in a span of 4 years. During that period, investors shifted their money out of emerging markets and poured money into the US market.

Analysts are arguing that the "dollar crisis" will have the same effect on emerging markets. My only concern is that the world cannot be immune from the slowing US economy. Unless, we see a clear decoupling, emerging markets will continue to be baffled by the weak US markets.

However, what is obvious is that emerging markets have outperformed the US market since July. Exchange rates are leading indicator for the markets. Funds will most likely invest in markets with an appreciating currency. Since 2002, the US dollar has fallen by 50% against major global currencies. On the other hand, the Peso has appreciated by 23% during the said period. Thus, on a relative basis, the Peso still has a lot of room to appreciate. This might be the catalyst for the Philippine market.

PSE at P1,305

Shares of local stock exchange operator, Philippine Stock Exchange, Inc. (PSE) rose to as much as P1,400 before settling at its current price of P1,305.0. PSE turned out to be my best pick (so far) for 2007. The good thing about PSE breaking above P1,000 is that member-brokers are now more willing to sell their stake. Note that the Securities and Exchange Commission (SEC) has mandated that member-brokers should hold no more than 20% stake in the exchange.

A PSE that is majority owned by institutional investors will generate better shareholder value in the long-run. It is quite ironic that an entity that regulates listed companies cannot even get its own stock dividend approved. Hopefully, with better shareholder mix, PSE can move towards professionalizing how it manages the business and at the same time maximize shareholder return.

For one, I cannot imagine why PSE should be sitting on close to P2.0bn cash that generates a measly 5% return whilst the PSEi is hitting new highs. PSE should come up with a dividend policy that pays out quarterly cash dividends to its shareholders. The exchange does not need to have excess cash in its book considering that it generates close to P150m cashflows per quarter. To my mind, the annual dividend pay-out should be P32.0 and not P8.86 per share.

Please read my past articles on PSE:

Hidden Gems

Hidden Gems II

PSE at P850.0

Current read: Asian Godfathers - Money and Power in Hong Kong and South-east Asia.

Asian Godfather is an interesting narration on how few "godfathers" control the economies of Hong Kong and Southeast Asia. The book, by Joe Studwell, compares these "godfathers" to the mafia overlords in New York who's business competencies are acquired through "concessions" and "wheeling-dealing" rather than innovating.

The book also gives a historical insight on how the "godfather" class emerged during the colonial times and how it continues to maintain its position.

Amongst the Philippine tycoons mentioned in the book are Henry Sy., John Gokongwei, Lucio Tan and Jaime Zobel de Ayala.

For reference,please read the commentary by William Pesek; Strictly Business: Godfathers in South East Asia. Please read: Godfathers in Asia

For comments, you can send me an email at jack.galt888@gmail.com

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

noreply@blogger.com (jack galt) — Sun, 21 Oct 2007 16:41:00 +0000

George Soros

Quote for the day: "My theory is that the next bubble will only come when everyone stops talking about bubbles all the time"

noreply@blogger.com (jack galt) — Fri, 12 Oct 2007 04:49:00 +0000

Marc Andreessen, Founder, Netscape Communications

Quote for the day: "Never risk what you can't afford to lose"

noreply@blogger.com (jack galt) — Thu, 11 Oct 2007 06:50:00 +0000

Anonymous

Weekend Notes: Peso at P25/US$1

noreply@blogger.com (jack galt) — Mon, 08 Oct 2007 14:49:00 +0000

Over the weekend, an article came out in Manila Standard quoting Albay governor Joey Salceda as saying that the Peso will reach P25.0 to US$1.0 in 5 years on the back of strong economic growth and continuously rising remittances. He further said that “I’m thinking [that because of these factors], in five years the peso would go back to the 25 [level]. It’s very clear as sunlight." Please read: Peso seen rising to P25/US$1

The call made by Gov. Salceda might sound like a "Marco Barrera upset" for now, but we should not take this lightly. After all, Gov. Salceda is the chief architect of the country's economic turnaround which saw second quarter gross domestic product (GDP) growth hit 7.5% - the highest level attained in 15 years.

To me, the level as to where the P/US$ rate will settle is immaterial. The most important thing to know is that the Peso is clearly on an uptrend (period). Below are the factors that will sustain the Peso uptrend in the coming years:

1.) Rising dollar inflow. Aside from OFW remittances, revenues from business process outsourcing (BPO) industry is growing at US$1.5bn annually. BPO revenues can potentially be as big as the remittance market. In 2006, total OFW remittances reached US$12.7bn and will likely hit US$15.0bn this year. On the other hand, the BPO industry generates US$4.0 in revenues and is expected to grow by 30% per year. Since BPO is mostly labor inputs, it is safe to assume that 85% of revenues will be kept in the local economy.

2.) Dollar savers no more. The past 10 years saw a massive increase in foreign currency deposit unit (FCDU) held by local individuals. This explains why the Peso remains at 69% below its pre-crisis level of P26.5/US$1. Local "savers" are the biggest hoarders of US dollars. Amidst the specter of a falling US dollar, local "savers" will likely shift their savings to Peso denominated assets. A key break below P44.0/US$1.0 will trigger a massive withdrawal of FCDU accounts.

3.) Compelling relative values. Traditionally, Thai Baht and Peso traded at parity. Currently, Thai Baht is at 34.029 whilst the Peso is at P44.75. This implies that Thai Baht is trading at 30% premium to the Peso. Considering that the Philippines has a much better growth outlook than Thailand, the premium is unjustified. At most, the Thai Baht should be trading at 15-20% premium over the Peso. This suggests that on a relative valuation, Peso should be hovering between P38-P41/US$1.0 levels.

An appreciating currency will definitely generate positive funds flow. To my mind, the movement of Philippine Long Distance Tel. Co. (TEL-P3,100) was driven mainly by the expected appreciation of the Peso. The fundamentals of TEL has not changed since the market bottomed last August 22. The surge in the share price of TEL merely mirrored the movement of the P/US$ rate. TEL is usually a leading indicator on where the P/$ rate is going.

However, in the long-run, the biggest beneficiary of an appreciating Peso will be property values. Property prices will have to adjust versus the value of the currency. Thus, as mentioned, the next big thing in the stock market will be property plays.

For comments, you can send me an email at jack.galt888@gmail.com

Weekend notes: Property - the next big play, Peso to hit new highs

noreply@blogger.com (jack galt) — Sun, 30 Sep 2007 12:50:00 +0000

Property - the next big play

Property stocks are set to take center stage. After mining, the property sector staged the biggest comeback since the market hit bottom last August 17. The PSE property index rose by 27% compared to the 24% increase in the PSEi Index. On the other hand, the mining index rose by 66.3% during the same period.

Mining stocks rose on the back of the decision of the U.S. Federal Reserve (US Fed) to cut rates by 50 basis points to 4.75%. The move led to a weaker US Dollar which boosted the value of gold and other base metals. Analysts term this as "asset reflation". In other words, prices of assets are moving inversely proportional to the value of US Dollar.

The "asset reflation" that we saw in the mining sector should spillover to the property sector as well. Real estate assets are no different from gold and other base metals. Real estate values will also move inversely proportional to the value of US Dollar. The Hong Kong market reached new highs in the past month on the back of an expected property revaluation. The Hang Seng Index (HSI) is heavy on property counters.

Hong Kong is viewed as the proxy for the property sector in the region. In other words, the "property revaluation" will eventually spillover to the rest of the region. Hong Kong essentially triggered the property bull-run in the early 90s.

Locally, the crucial event to watch out is how the bidding for the remaining lots in Fort Bonifacio pans out. The government is set to bid out 1.2-hectare lot in Fort Bonifacio Global City for a minimum bid price of P160k per square meter. Already, 8 bidders have signified interest. My gut feel is that the bid will likely surprise on the upside.

In 1996, lots in Global City sold for P168,000.0 or US$6,350.0; based on P26.5:US$1.0. Fast forward to 2007, the P160,000.0 is equivalent to US$3,550.0 at current exchange rate. So, in effect, the asking price is still 44% below what it was 10 years ago. To approximate the value paid in 1996, price per square meter should go up to P292,000.0. This leaves a lot of room for upside.

I have written a lot about the upcoming property boom. However, the most compelling argument is that property prices are nowhere near the levels we saw in 1996 despite that fact that per-capita income has doubled to US$1,400 while the PSEi index has climbed back to the 1997 levels. Everything else equal, property values should follow.

As mentioned, Fil-Estate (LND-P1.22) is my top-pick. The expected property revaluation will further enhance the value of LND considering that it owns close to 3,000 hectares of landbank. Based on its current market capitalization of P3.5bn, the implied value of its landbank is just P1,166.0 per square meter. This is way "too cheap" considering the prospects of asset revaluation and an ongoing turnaround plan. To date, LND has arranged close to P2.5bn worth of financing to complete its various projects.

I am also looking closely at SM Dev't Corporation (SMDC - P4.30). From the looks of it, the SM group will likely consolidate all its property and tourism ventures under SMDC. After successfully merging Equitable PCI Bank with Banco de Oro (BDO - P56.0) in 2007, it would not be a surprise to see SM Group make a major move in 2008 to restructure its property and tourism assets under one listed vehicle. Already, Henry Sy has mentioned that the next big thing for the country is tourism. Simply put it, follow where the billions are going.

Peso to hit new highs

A leading investment bank has predicted that the P/US$ rate will hit P42.0 to US$1.0 by end of the year.

The best gauge on where the P/US$ rate is heading is to look at the movement of Philippine Long Distance Telephone Co. (TEL - P2,950.0). TEL, the largest Philippine company by market capitalization, is a proxy for foreign funds flow.PLDT rose by 30% since it hit bottom last August 17. Typically, the P/US$ rate captures 60% of the movement of TEL shares. So base on this, the P/US$ will likely appreciate by 18% from its recent low of P47.00 to US$1.0, to around P40.0.

TEL is the only PSEi component stock that made new highs after the market rout. There is no material change in the fundamentals of PLDT. The move merely reflects a looming Price Earnings Ratio (PER) expansion. TEL is currently trading at 16x PER to 12/07 earnings - its highest level in more than 5 years. So most likely, other PSEi component stocks will follow.

For comments, you can send me an email at jack.galt888@gmail.com

Weekend Notes: Another "P" for Jollibee (JFC-P52.0), The GEO Grace (GEO - P1.96) phenomenon

noreply@blogger.com (jack galt) — Mon, 24 Sep 2007 09:46:00 +0000

Another "P" For JFC

JFC added another "P" in its "4P" metrics.

Last Friday, JFC announced that it will acquire Beijing based Hongzhongyuan chain of congee restaurants. JFC is paying US$50.5m for the acquisition. In a disclosure, the company said that Hongzhongyuan operates 33 stores and generates close to US$24.5m in sales. It also mentioned that Hongzhongyuan is "highly profitable" and debt-free. This is the second acquisition of JFC in P.R. China. In 2004, JFC paid US$22.5m for a controlling stake in Shanghai-based Yonghe King. This brings JFC total store count in P.R. China to 138.

The acquisition should bolster the potential of JFC. China is a vast market for JFC to grow. Each province in China can potentially be as big as JFC's reach in the Philippines. I am confident that JFC can replicate its success in Yonghe King. In 2005, Business Week named Yonghe King as "Top 10 Most Valuable Brand Franchise" in China. From how things are shaping, JFC will likely develop a "home-grown" franchise for each province in China to suit the local taste.

As a "4P" stock, the value of JFC should approximate its average growth prospects in the next 3 years. JFC is currently trading at 17.0x PER. To my mind, JFC should trade at around 20-22x PER.

The GEO phenomenon

Is GEO a "hype" or a "reality"?

GEO has a market capitalization of P5.0bn. On paper, it has P500m in cash that was generated from the recent rights offering and P173.0m worth of mining claims. For 2008, GEO expects to generate US$70m in revenues and US$20m in net income. So from a valuation perspective, GEO trades at 7.4x and 7.8x Price to Assets (P/A) and Price to Earnings (PER) respectively based on 2008 forecast.

Thus at these levels, valuations look "hyped-up" and the "reality" of seeing any earnings is still months away. Who knows what will happen to commodity prices in 2008.

However, more than the argument on "hype" or "reality"; GEO is a phenomenon that we cannot ignore for as long as the commodity boom stays its course. GEO is a proxy play on the renaissance of the local mining industry. Based on estimates, the sector is expected to generate US$6.0bn revenues by 2010 or roughly 10x what it was three years ago. In 2004, total mineral output reached a mere US$650m. What is happening to GEO is a microcosm of the turnaround in the mining sector. Despite the huge run-up of mining stocks, the combined market capitalization of the sector is "just" P85.0bn. This suggests that mining is still underrepresented in the market. For comparison, Megaworld (MEG - P3.20) has a market capitalization of P60.0bn.

Looking back, the "GEO phenomenon" is not an aberration. It is a reality that we saw during past booms - internet, property, telecoms, emerging markets etc. At the height of the internet boom, 2 stocks that best reflect this phenomenon are College Marketing Group, Inc. (CMGI) and Softbank Capital (SB). Both companies saw its market value surge from less than US$1.0bn to almost US$140.0bn. CMGI and Softbank seeds start-ups that will eventually become major players in their markets. Some notable names include Yahoo, eTrade, Snapfish and Geocities.

So, beyond "hype" or "reality"; investors should learn to live with the phenomenon.

Quote of the week

Henry Sy: You cannot just depend on what is happening; you should always be ahead. Many of the things that we do are not according to market trends

Deconstructing Henry Sy, The Asset, July/Aug 2007 Issue

For comments, you can send me an email at jack.galt888@gmail.com

"4Ps" - Finding the next Starbucks in the Philippines

noreply@blogger.com (jack galt) — Fri, 21 Sep 2007 09:15:00 +0000

Last week I wrote about the "4Ps" - great People, leading Products, huge Potential and Predictability, that was coined by Michael Moe, founder of Think Equity Partner as a basis for finding the next winners. To know more about the "4Ps", please log on to www.findingthenextstarbucks.com.

I received several emails asking me if the "4P" methodology is applicable to Philippine companies. Obviously, the answer is YES. Two companies that come to my mind are Jollibee and SM Prime Holdings. Let's look back and see how these 2 stocks performed since it went public.

Jollibee (JFC - P52.0) was listed in 1993. Its market capitalization upon listing is P3.3bn. Systemwide sales at that time was a "mere" P4.1bn. Today the company generates P34.0bn in revenues with systemwide sales reaching P44.0bn - roughly 10x from where it was 14 years ago. Its current market capitalization is P52.1bn. Earnings, on the other hand is expected to hit P2.5bn this year or 8.6x more than the P290m it reported in 1993.

So, if you kept your Jollibee shares since IPO, your P6.0; would have grown 9x to P52.0. On top of that, the company paid out P2.35 in cash dividend which further reduces your investment cost to P3.65 per share.

As a budding analyst, Jollibee was one of the first companies I covered. I was fortunate to have a one-on-one interview with its founder, Tony Tan Caktiong. Skeptics were saying that the Philippines cannot support the growth that its founder has set. At that time, there are less than 100 Jollibee sores. I remember vividly Mr. Tan Caktiong saying that he envisioned Jollibee to have 500 stores in 10 years. Today, after 14 years, Jollibee has a total of 1,559 stores - outpacing even the target set by Mr. Tan Caktiong.

So let's do the "4P" test on Jollibee.

First, great people. You can never argue with a visionary. Mr. Tan Caktiong set out to build Jollibee into the biggest quick service chain in the country. He has the distinction of beating US fastfood giant McDonald's in its own ballgame. Second, leading product. "Chicken Joy" is the top selling fastfood item in the country. It is something that Filipinos all over the world craves for. In fact, "Chicken Joy" brought Jollibee to where it is now. Third, huge potential. Jollibee leveraged its expertise in the quick service sector by expanding into other sub-segments of the market and eventually being leader at that. It owns the number one Chinese fastfood chain - Chowking, the largest pizza chain - Greenwich Pizza and the biggest bakery outlet - Red Ribbon. With the way things are going, Jollibee can more than double its current size to 5,000 stores by 2012. Fourth, predictability. It is very easy to estimate the earnings of Jollibee. Drivers for earnings growth are clear - revenue per outlet multiplied by number of stores. For the past 14 years, the company has consistently delivered double digit earnings and revenue growth. Based on current trend, earnings for Jollibee can reach the P5.0bn mark in the next 5 years.

SM Prime (SMPH - P11.0) was listed in 1994. Its market capitalization upon listing was P29.3bn. Total revenues was P2.2bn with net income reaching P1.0bn. There were only 3 SM Malls operating that time. During its IPO, SMPH was priced at a lofty 29x PER. Analyst said it was overvalued. However, Mr. Henry Sy stuck to his vision and mentioned that the growth potential of SMPH far outweighs its lofty valuations. During the roadshow, Mr. Sy mentioned that SM Malls will be present in all major cities in he Philippines and promised that earnings will grow by at least P500m every year. People doubted but the taipan persisted.

Today, SMPH generates P15.0bn in revenues with earnings expected to reach P6.0bn. By year end, there will be 31 SM Malls nationwide. On the other hand, its market capitalization has reached P130.0bn. From its listing, shares of SMPH have risen from dividend adjusted P2.36 per share to P11.50 - or roughly 400% return. During the same period, the company paid out close to P2.0 in cash dividend.

So let's do the "4P" test on SMPH.

First, great people. No one can argue with the richest man in the Philippines. Mr. Henry Sy set out to build SMPH into the biggest retailing concern in the Philippines. No doubt, he is Sam Walton's counterpart in the Philippines. Second, leading product. SM Mall has the largest retail space in the country and commands a 30% price premium over its nearest competitor. I guess, the 50% net margin is a testament to this leadership. Third, huge potential. Until such time that SM Mall is present in all the major cities in the Philippines, skeptics should stop asking how SMPH can grow its revenue. The 31 malls in its portfolio today, can potentially be 100 malls in 10 years. Fourth, predictability. Like Jollibee, earnings drivers for SMPH are clear - revenue per sqm. multiplied by the number of retails space. For the past 13 years, earnings for SMPH has grown by an average of 25% p.a.

No doubt SMPH and JFC are "4P" stocks that investors should own. Incidentally, Henry Sy is the biggest shareholder in JFC outside the Tan family. It shows that Mr. Sy practices the "4P" principle in his investments as well.

For comments, you can send me an email at jack.galt888@gmail.com

Technicals vs. Fundamentals: It's all about risk management

noreply@blogger.com (jack galt) — Wed, 19 Sep 2007 01:37:00 +0000

One of the most debated topic in stock investing is whether to use technical or fundamental analysis. To me, its a non-issue; both analysis are as important. In simple language, technical analysis tells us when to buy whilst fundamental analysis tells us what to buy. Investors should use both in coming up with their investment decisions. In fact, even "purist" on either sides cannot ignore the fact that they use both analysis in arriving at their conclusions. Investors who use fundamental analysis will ultimately based his/her decision on certain fair value assumptions which is based on price. On the other hand, investors who use technical analysis will refer to certain fundamental reasons - be it a hot tip, rumors, earnings news etc. in choosing which stock to chart.

Investing is not an exact science. No system can predict with certainty which way a stock price will move. It boils down to probability. The most important thing, to my mind, is how risk is managed. As a regular reader of Finance Manila , I suggest to keep a close watch on the posts of agent_tracker and Mark T. Market. These guys are good in presenting their arguments using both technical and fundamental analysis.

Previously, I talked about how I apply the "rule of 3" in allocating my portfolio into three groups of stocks based on expected returns: speculative, long term and patient bets. Please read: Rule of 3 I also follow the "rule of 3" in building my stock position. As a rule, I buy stocks in quantities that are divisible by 3. This allows me to divide my holdings into three, 1/3 positions. The first 1/3 is my "trading" position whilst the other 1/3s are my "core" and "insurance" positions. The trading position is for me to trade out the price range whilst waiting for the price to go up. By doing so, it helps me lower my average cost and at the same time hedge my bets just in case things go wrong. On the other hand, my "core position" is what I long until the stock reaches my target price. Finally, my "insurance position" is what I keep after I sell my core and trading positions. Most likely, by that time, the "insurance position" has zero cost in my books. So whatever happens, I have already realized the full benefit of my position.

Thus, by combining technical and fundamental analysis, one gets to manage portfolio risk. In the end, it is not about winning all the time but more about winning most of the time that matters.

For comments, you can send me an email at jack.galt888@gmail.com

Weekend Notes: Gold, Banking sector + The 4 Ps

noreply@blogger.com (jack galt) — Mon, 10 Sep 2007 03:05:00 +0000

Gold at US$1,000?

It seems that gold is heading towards US$1,000.0 based on its recent price action. For the first time this year, gold closed above US$700.0. A chartist friend of mine told me over the weekend that a major breakout is in the works for as long as the central banks would refrain from selling gold in the open market.

I totally agree with my friend's observation. There are two things that will trigger a breakout. First, the US Federal Reserve will likely cut interest rates by more than 75 basis points in. Based on the futures number, the expectation is for a 25-50 basis points cut in overnight borrowing rate. The US job report for august - which saw the labor market shrunk by 4,000 jobs, will likely fuel this move. This is the first time since 2003 that the US economy registered negative job growth. Second, holdings of US treasury bonds by government and central banks at US Federal Reserve fell by 3.8%, the steepest decline since 1992. Please read: Treasury Rally May Falter These two trends will likely see the US dollar trade lower in the coming weeks. Considering that gold price is inversely correlated to US dollar, I must say that the writings are clearly on the wall.

Banking sector consolidation seen

Investment banking giant UBS Securities Philippines is bullish on the banking sector due to reforms seen leading to better asset quality, loan growth and operating efficiency. They also expect mergers and acquisitions (M&As) to perk up the industry with the top 3 banks -Metrobank (MBT-P55.0), Banco de Oro (BDO-P58.0) and Bank of P.I. (BPI-P62.0) expected to acquire banks with specific niche. Please read: UBS Bullish on RP Banks

The best way to play the sector is to look at banks that will likely be the targets. I do believe that both Security Bank (SECB - P72.50) and RCBC (RCB - P23.75) are candidates for acquisition. SECB has a strong niche in the mid-size/Chinese merchant market that will fit nicely into BPI's portifolio. On the other hand, RCB can provide the "asset boost" to either BDO and MBT in their quest to become the largest bank. RCB is also the cheapest bank in the sector at .80x P/Bv giving investors the best upside potential in any m&a plays.

The 4 Ps

I am currently reading "Finding the Next Starbucks" by Michael Moe. The book was recommended by CKP through his blogsite www.ckp168.com. Mr. Moe is the founder of ThinkEquity Partners - an investment management company based in San Francisco. During his stint as an analyst in Merrill Lynch, he was amongst the first to recommend Starbucks Coffee Co. The company turned out to be one of the best performing stock in the last decade. From a mere US$250m company during IPO in 1992, Starbucks now sports a market capitalization of US$20.0bn

In looking for the next big winners or the next Starbucks, Michael Moe suggests that we focus on the 4 Ps - great People, leading Product, huge Potential, and Predictability. Please log on to www.findingthenextstarbucks.com to read excerpts from the book.

Wealth Effect

noreply@blogger.com (jack galt) — Mon, 03 Sep 2007 09:59:00 +0000

Incredible?

Last Wednesday, Pres. Gloria Arroyo announced that the Philippine economy rose at its fastest pace in 20 years. Based on the recent figures reported by National Statistical Coordination Board (NSCB); GDP in 2Q07 grew by 7.5% versus the consensus forecast of 6.5%. In 1Q07, GDP rose by 6.5%. The GDP number is clear sign that the economy is roaring ahead. To critics, the figures seem incredible. To me, the numbers are believable. Here's why.

The services sector contributed 4.1 percentage point to the overall GDP growth. The sector grew by 8.4% in the said quarter. The biggest driver in the services sector is the business process outsourcing (BPO) industry. In 2007, BPO revenues is expected to grow by 66% to US$3.5bn from US$2.1bn in 2006. Note that BPO revenues are mainly labor inputs - salary and wages. So this means that the US$1.4bn will translate to incremental expenditure in the economy. The burgeoning BPO sector has emerged as the proverbial "silver bullet" of the economy. Based on estimates, for every US$1.0 generated, close to 80% or US$0.80 is kept at home. In other words, the net value-added high. Contrast this to the mid-90s when growth was reliant on electronics export. For every US$1.0 that was generated then, only 20% or US$0.20 is kept at home since most raw materials have to be imported. So looking beyond the headline figures, the numbers are indeed credible.

Wealth stocks

Amidst the backdrop of a roaring economy, investors should focus on stocks that reflect the new found wealth of the Filipino consumers. Clearly, a paradigm shift will emerge as Filipinos change their spending habits. Below are 2 stocks that fall under this category.

1.) Jollibee (JFC - P55.0). Obviously, eating-out as a percentage of overall expenditure will expand. I guess this is already reflected in the recent earnings result of the company.JFC reported that 1H07 earnings rose by 31%. However, what is more important is that top-line revenue continues to grow at double digit pace. This reflects the bullish trend in thefastfood sector considering that Jollibee is the number 1 chain in the country.

Jollibee currently trades at 22.0x PER to 12/07 earnings. My "gut feel" is for the stock to trade at 30x PER - or roughly around P75.0 per share. The potential re-rating should capture the underlying growth of the company and at the same time ride the "wealth effect" paradigm.

2.) Alaska Milk (AMC - P5.10). To some extent, milk consumption is also a proxy play for wealth effect. Milk is not a staple amongst Filipino consumers, however, with higher disposable income brought about by higher GDP growth, milk consumption will likely increase.

I have written about AMC before and its 1H07 numbers further strengthen my belief that the company is a gem-of-a-stock. AMC reported that 1H07 earnings rose by 156% on top of a 183% increase in 2Q07 net income. Again, what's more important is that top-line numbers continue to grow on back of higher selling price per unit and volume recovery. This suggests that consumers are willing to pay more without affecting consumption behavior.

AMC is currently trading at 6.0x PER to 12/07 earning. To my mind, the company should easily be valued at P8.50, equivalent to 10.0x PER to 12/07 earnings. The ingredients for a re-rating are in place: earnings growth + market dominance. The acquisition of Nestle milk brands earlier this year effectively gaveAMC 90% share in the liquid milk market. I guess the valuations are too compelling to ignore.

The property sector on the other hand will mirror the "feel good" effect of the economic boom. What we are seeing right now is that local property sales is growing at a much faster pace than sales to overseas Filipinos. The amount of property ads that we see in major newspapers is a sign that real estate companies are aggressively tapping the local market. This harps back to the property boom of the mid-90s.

However, what we are seeing is a recovery- and not quite a bull market yet. This means that big money can still be made in the sector and investors can position ahead of the curve. Property play will be a major investment theme in 2008 similar to how mining plays emerged in the past 2 years. Note that property prices are still 30-40% below its 1997 peak. In dollar terms, property prices are mere 30% of its 1997 highs. Thus, it is safe to assume that property prices have more room to grow - until such time we see it go back to those levels.

In the coming weeks, I will write more about the property sector and discuss some possible property plays to watch out. We saw how C&P Homes (CMP - ) morphed into Vista Land (VLL - P5.10) and in the process rewarded its shareholders with 150% return when VLL was listed. Please read The Saga Continues . I have also written extensively about Fil-Estate Land (LND - P1.16) and looking ahead, I think the stock remains to be attractive at current levels. Please read Fil-Estate Land

Quote: "I can spend money faster than Imelda Marcos when things are right"

noreply@blogger.com (jack galt) — Wed, 22 Aug 2007 03:18:00 +0000

Warren Buffet, Chairman, Berkshire Hathaway

"Investors are far more concerned about missing the next leg in the bull market on the upside, than about the risk of losing a lot of money"

noreply@blogger.com (jack galt) — Sun, 19 Aug 2007 14:27:00 +0000

Marc Faber, www.gloomboomdoom.com

Quote for the day: "It's always darkest before dawn."

noreply@blogger.com (jack galt) — Fri, 17 Aug 2007 06:17:00 +0000

Author unknown

Vista Land (VLL - P6.855) - The good, the bad and the ugly

noreply@blogger.com (jack galt) — Sat, 21 Jul 2007 07:56:00 +0000

I replied to a comment by a reader regarding VLL. Please read
The Saga . I guess to be fair to my readers, let me "blog" down my comment.

Let me start with the "ugly". Investors are hesitant to subscribe to the offering because of the poor performance of Aboitiz Power (AP - P5.60)

Lets put the performance of AP in perspective. The offering price of AP was priced at a premium to the utility/power sector average valuation. So this means that investors are better off buying other cheaper utility counters like Meralco (MERB - P100) , Manila Water (MWC - P14.50), First Generation (FGEN - P68.0) which trades at 20% discount to AP's offering price. Obviously, the market has to correct the disparity. Besides, its parent - Aboitiz Equities (AEV) never traded at a premium. So from the start, its a long shot for AP.

What's "bad" about the offering of Vista Land is that investors are still haunted by the the C&P Homes debacle that happened at the height of the financial crisis. In 1999, the company defaulted on US$150m worth of debt leaving investors with worthless papers. I guess the "C&P" stigma is just hard to shake-off. However, taking out "emotions" from our judgment, the situation is not unique to C&P Homes. Most heavily indebted companies went through that phase as well. So it is unfair to single out C&P Homes. What we have to realize is that companies that have undergone successful restructuring are the big winners in this market. Think Bepnres (BPC - P5.30) and Meralco (MERB - P100.0). In fact, the market has voted. Share price of Vista Land/C&P Homes rose by as much as 406% in 2007, making it one of the best performing stock in the market today.

So what's "good" about the offering is that the fundamentals of the company have gotten better. C&P Homes is a totally different animal after the company was acquired by Vista Land. So how do the numbers stack up?

My price target for VLL is between P8.0-P10.00. This has been my target since I recommended C&P Homes last February. Vista Land is expected to make P3.5bn net income this year. This translates to a Price Earnings Ratio (PER) of 18x to 12/07 earnings. Both Megaworld (MEG) and Filinvest Land (FLI) trades at 30x to 12/07 earnings. Assuming VLL trades at 25x PER, this should bring its price to P9.40 per share. I feel that 25x is a fair PER vis-a-vis MEG and FLI. My premise is that we are just at the beginning of the property bullrun where earnings are likely to surprise than disappoint. Thus the higher PER is justified at this point on the back of an anticipated re-rating in the coming months.

Note that after the offering, VLL will have a net cash position of P8.0bn and roughly 1,100 ha. of land bank to develop. This will make VLL one of the better capitalized property company in country. This gives VLL an enviable war chest to parlay in the booming property sector. Simply put, the turnaround chapter is now in play.

Quote for the day: "We need a little bit of sanity in a period in which everyone feels invincible"

noreply@blogger.com (jack galt) — Mon, 25 Jun 2007 09:04:00 +0000

Ken Lewis, CEO, Bank of America

Fil-Estate Land (LND - P1.32) + Philippine Stock Exchange (PSE - P850.0)

noreply@blogger.com (jack galt) — Thu, 21 Jun 2007 09:05:00 +0000

For the past few days, I have received numerous emails asking me about LND and PSE. Just to be fair to all my readers, here is my take on the 2 stocks (again):

Fil-Estate Land
LND together with C&P Homes (CMP - P4.05) are my top picks in the property sector. I always believe that big money is made when there is a paradigm shift in the fundamentals of the company. For CMP, it is a continuing saga and we should likely see the share price trade near P10.0 as the new entity - Vista Land; prepares to do a follow-on offering.

For LND, I do believe that my near term target of P1.70 is already a given. When I wrote my arguments for LND, (please read ... Casino Royale) last January, my thesis is that LND owns valuable land-bank which it can use as equity in pursuing new projects. At that time, LND was trading at P0.80 or roughly 33% of its book value. My back-of-the-envelope computation is for LND to trade at 50% book value or roughly P1.70 per share.

However, things have improved. LND entered into a partnership with Megaworld to develop its property in Nasugbu, Batangas. On top of this, Megaworld was given warrants to purchase 1bn new shares of LND at P1.25 per share. Also, LND issued P500m convertible bonds to LIM Asia to fund its existing projects. So clearly, LND has a properly funded "move forward" plan that should bring it out of its dormant state. I guess, beyond the projections on how much revenue the new projects will deliver, I do believe that in the next 3-6 months, LND should approximate its revised book value of P2.65/share. Here's why?

1.) LND is out of the bankruptcy scenario. This means that we can already value its asset at face value - P1.0 of asset is now equivalent to P1.0.

2.) The "Sobrepena discount" is still factored in even if LND trades at book value. Note that most property companies trade at multiples to book value. So, I guess, at 1x book value, there is still sufficient discount in the valuation.

3.) On the other hand, we have the "Megaworld" premium. Since Megaworld is taking over the Twin Lakes project, this asset should be valued at a premium.

4.) Money is flowing into the property sector. The recent tie-up with Megaworld will put LND in a better position to ride the bull.

Just like the C&P Homes story, LND is crafting its own turnaround saga. I am betting that there are more chapters to come. CMP rose from P1.50 to P4.25 in a span of 5 months. So based on that analogy, LND still has a lot of room to catch-up. Beyond the property sector, we also saw Benpres (BPC - P5.10) rose 5-folds on the back of a recovery story. So, as I like to emphasize, the writings are clearly on the wall.

Philippine Stock Exchange

PSE is another stock that gained a lot of attention in the past few days. I have always like PSE as a proxy to the bull market. Note that PSE has beaten the PSEi Index by more than 20-folds. PSE has risen 486% compared to the 24.7% increase in the PSEi Index.

There are two things driving the stock right now.

First, earnings. I guess, with the market trading at an average of P6.0bn per day compared to the P1.5bn average in 2006, earnings will beat even the most optimistic estimates. On top of that, there are more mega-IPOs, follow-on offerings and mergers to come. To my mind, the P34.5bn raised so far in 2007 is "peanuts" compared to the coming deals. Vista Land alone, is looking to raise P25.0bn in 2H07. Initially, I was looking at P500m net income for PSE, but based on current trends, PSE can easily make P750m.

Second, the m&a trend. Recently, the Tokyo Stock Exchange (TSE) bought a 5% stake in Singapore Stock Exchange (SGX) for US$300m. I am betting that there are more deals to come and PSE will definitely be in the watch-list. Globally, shares of listed stock exchanges are breaking new highs.

So I do believe that my initial target of P1,000.0 is already a given. The target is based on P500m net income valued at 30x PER. So, based on a revised net income target of P750m for 2007, PSE, can potentially trade at P1,500.0. To put things in perspective, the market value of PSE in dollar terms is US$277m. It is hardly enough to buy a 5% stake in SGX. Clearly, there is room for upside, even if PSE is a "dog" amongst the exchanges in the region.

To read my past article on PSE, please go to Hidden Gem

Quote for the day: "The best way for a person to have happy thoughts is to count his blessings and not his cash"

noreply@blogger.com (jack galt) — Fri, 15 Jun 2007 08:04:00 +0000

Author unknown

The Saga continues: what's next for C&P Homes (CMP - P4.05)

noreply@blogger.com (jack galt) — Wed, 13 Jun 2007 02:45:00 +0000

Last March, I wrote an article on C&P Homes entitled "Turnaround Saga - The C&P Homes Story" Please read: Turnaround Saga - The C&P Homes Story

I guess the saga has entered the "recapitalization" chapter. Yesterday, Vista Land - the new C&P Homes announced plans to raise P25.0bn in a follow-on offering. Please read: Villar Firm .

The next question is how the "recapitalization" chapter will unfold. To my mind, there is little to speculate about it and instead just read the writings on the wall. First, creditors of C&P Homes have agreed to convert their debt into equity at P8.0 per share. In other words, the debt was paid in C&P Homes shares valued at P8.0 each. I do believe that P8.0 is the accepted Net Asset Value (NAV) per share of the new company. I would put a lot of credence into the valuation since creditors have better access to the financials of the company. Second, in a filling with the Securities and Exchange Commission (SEC), Vista Land plans to offer 2.548bn shares at P10.0 per share. The P25.0bn offering will make it the biggest follow-on offering in the history. So clearly, the recapitalization chapter will likely see C&P Homes at P10.0 per share. If that happens, it will be a nice epilogue to the turnaround saga.

However, beyond the play on C&P Homes, the bigger picture is the overall property bull market which a lot of people are still skeptical. I guess, with P25.0bn that will flow into the sector, there is really no reason why we should not follow where the billions are going. Also, the C&P Homes turnaround strategy will likely be the model for Fil-Estate Land (LND - P1.04). I will write more about LND in the coming days.

Hidden Gem: Wala Pa Rin Tatalo sa Alaska (AMC - P5.40)

noreply@blogger.com (jack galt) — Thu, 07 Jun 2007 08:17:00 +0000

As the tagline says: nobody can beat Alaska. I guess the phrase aptly describes my investment argument(s) for Alaska Milk. As the market hits new highs, it's very hard to find bargains that can likely return 50% - 100% in the next few months. Indeed Alaska is one of the few hidden gems still to be discovered by the market.

From the outside, there is nothing "sexy" investing in a milk company. However, looking closely, Alaska has the potential to beat the "hot" sectors right now like mining and property stocks over the next 12 months. The way liquidity is flowing into the market, I guess, it is a matter of time before investors start re-rating Alaska. Here's why:

Earnings + revenue growth. For 2007, earnings are expected to grow by at least 50% to P600m. Growth will be driven by better margins and higher revenues from the acquisition of Nestle's milk business. Alaska expects the acquisition to add at least P3.0bn to its full year revenue. So by 2008, Alaska should be generating at least P9.5bn in sales compared to P6.0bn in 2006.

Nestle acquisition = monopoly. What's surprising is that the market has ignored the potentials of the Nestle acquisition. The combined Alaska and Nestle business will have a virtual monopoly in the local canned milk market. This is a classic case of "1+1=2.5". Alaska is strong in the the retail market whilst Nestle is big in the institutional segment. So moving forward, Alaska will be strong on both ends of the milk market. Added to this, the existing infrastructure of Alaska can readily support both businesses. Thus, there is synergy from day 1.

One of the most "tried and tested" investment philosophy is to buy when there is an obvious change in paradigm. The "new" Alaska is a totally different animal from the "old" Alaska. It is now the undisputed industry leader.

5.5% dividend yield = margin of safety. Alaska pays around P0.375 per share in cash dividend per year. This translates to an annualized yield of 5.5%. At this rate, Alaska pays an even better yield compared to the 365-days T-bill rate which currently is around 5.1%. This is a classic case of investing with adequate margin of safety. At worst, you will still be getting a decent return on your investment. This beats leaving your money with the government.

Valuation is sexy. Alaska currently trades at 7.0x PER and 4.x EV/EBITDA. It's cash per share amounts to P2.20. So effectively, the market is paying a mere P3.20 for the value of its milk business. To my mind, Alaska should be trading at 10.0x PER and 12.0x EV/EBITDA to capture the full value of its business. At those levels, Alaska is easily worth between P7.60 and P10.0 per share. I guess, to be able to buy a stock at single digit PER, generating 50% earnings growth makes an investment sexy. Assuming my assumptions are correct, this should translate to 50 - 100% return in the next 12 months.

Quote for the day: "Where there's smoke, there's fire."

noreply@blogger.com (jack galt) — Wed, 06 Jun 2007 10:26:00 +0000

Author Unknown