Stock Update as of Feb. 21, 2013

The market started to climb in the morning, reaching the 6680 level, but tapered down and reached 6620. This could be a minor correction day or it could continue throughout the week. Keep some cash ready to buy on dips.

I added 3 new stocks into our list:EEI, SMPH, and DNL. Also, COL released their new FV. Below are the new estimates and BBPs.

EEI has the largest upside of all because of the PPP Projects to be implemented this year.

As always, Caveat!

No Major Correction Yet

by Gus Cosio


Many PSE investors have been waiting for a correction, myself included, for a few weeks now. It hasn't happened in a big way yet. What we have been seeing are intra-day corrections or shallow end of day ones. The market looks expensive from an aggregate point of view, but do not mistake the forest for the trees.
I think the reason why the index has been resilient is because a good number of individual stock still offer good value.

Take 2 very expensive stocks -- ALI & BPI. Both of them were very expensive when they were 20% lower. Why does it defy pricing logic that both stock have gone higher? Well, I think it is because different investors have different investor parameters. One thing common with both ALI & BPI is they both have very stable earnings and high returns on equity. I think the way these 2 stocks are priced reveals one dynamic of the market and that is when institutional investors want an exposure to a particular market, they choose stocks that have both financial soundness and heft.

I think the same thing can be said of SM & SMPH. And as this logic proceeds, we can understand why AC and GTCAP are pushing towards what usual analyst logic would see as expensive.

What we are forgetting is the idea that a game changer has been unfolding in our market which is the idea of a credit ratings upgrade. The forward looking rationale is that money wants to be in the game before it is played. If we believe indeed that the country is up for an upgrade, then the idea of being expensive should not deter us from remaining constructive on local stocks even if analysts see it as expensive. After all, many analysts have been proven wrong many times.

As a matter of strategy then, I think it is still wise to be exposed even to some of these expensive stocks. More importantly, because we expect the economy to do better, we should even be more confident in stocks with cheap valuations and sound financial conditions. This, I think, would be the best way to derive returns in the Philippine market.

Stock Update as of Feb. 8, 2013

As you can see from the chart above, the PSE started high then declined in the afternoon. Among our stock picks, we can now only choose 2: MBT and PSE (the stock). Another choice would be to just stay on cash and not invest on your picks. I strongly believe that a correction or a consolidation will occur soon.

What is a correction/consolidation? It's best if I use an example. Let's say random investor Mr. X bought FPH at P70.00, and he set his target price at P108. As you can see, FPH's current price is already P108, so Mr. X sells his FPH stocks. Let's say there are quite a few people just like Mr. X whose TP is also P108. Conservative investors  like us are no longer buying because the price is now above our BBP. If: Supply > Demand = Stock Price declines. Basic economics. This event is called a correction/consolidation.

One strategy that we can employ is to buy stocks when this happens. Even if the stock is already above our BBP, but still has 10% upside, then I personally would still buy that stock. For example: MPI, PGOLD, BDO, and FPH.

The stock price will continue a decline until investors feel that it is already cheap enough to get into, so they will begin buying the stock again. But what happens if no one wants to buy? Then that will be the start of a market crash...when no one wants to buy.

So if that is how easily market crashes happen, then why should I continue to invest? I might lose all my money! Yes, it can happen, but look at the Philippine economy right now. It is booming. For 2013, analysts project the PSEi to reach 7,000, and that is still excluding the expected upgrade of our market to Investment Grade which is foreseen to happen this year.

A second strategy would be to adopt the buy-and-hold method of investing. I'm still a very risk averse person. And if you're like me, then what stocks should we be picking now? Every stock seems so expensive. I would advise you to choose defensive stocks or companies that sell products that everyone will buy.

Like what? Like Aboitiz Power(AP), Meralco (MER), Manila Water Company (MWC). People will always buy electricity and water. You can also pick MPI who have investments in water, electricity, tollways, and hospitals. Consumers will always need these products, and that's why they are considered defensive.

I've removed PNX and IPO from the list because PNX was a dividend play. If you have PNX, TP is P14.9. I'll be making an update about PNX once I know when the dividends will be released. As for IPO, it is growing too slow for my taste. If you are currently holding IPO, you can sell now at a loss of P20, but you can reinvest the cash into another stock. Or, you can just hold onto it. IPO gives consistent dividends every year and is also considered a defensive stock because its main investments are in schools like the Mapua Institute of Technology.

God bless your investments, and as always, Caveat!

Market Summary as of Feb. 5, 2013

• The PSEi continued to rally strong, increasing by 117.37 points or 1.86% to breach the 6,400 mark and close at 6,435.98.

• Index gainers led decliners 24 to 4 while 2 issue remained unchanged. All sectors were up by at least one percent during the last trading session. Significant gainers were SMDC (+6.00%), SMC (+4.62%), RLC (+4.37%), BDO (+4.14%), and AC (+4.08%). On the other hand, notable decliners were AP (-0.65%) and ALI (-0.33%).

• Value turnover decreased to Php11.2Bil from Php11.6Bil last Friday. Foreigners continued to be net buyers, acquiring Php2Bil worth of shares.

Is the PSE overheated?

From the facebook wall of Gus Cosio:


With the PSEi closing at 6,318.61, a lot of us may be asking -- has the market gone up too high too early? Are valuations stretched? Are we now waiting for the last sucker to buy all these shares from us?

I don't have the answers, but I have a few ideas to share. First of all, the equities market is not homogeneous, If you glean over the PSEi statistics for the day, they highlight the number of stocks that are up and the number of those that are down. In essence, the market assesses relative value on a constant basis. When a stock is expensive relative to the rest it gets sold. Alternatively, when it gets too cheap, hopefully it gets sold. Of course, there are stocks that are market favorites and consistently enjoy premium valuation by investors. My point, nevertheless, is that there is wisdom in managing a portfolio by assessing relative value.

Due to relative valuation, compared to what people get in fixed income investing nowadays, market participants are willing to accept higher valuations. P/E is a measure of how much capital a company needs to produce a dollar/peso of earnings. If you get the inverse of that ratio, you arrive at something akin to bond yield although not exactly alike in terms of pay-out. My point, however, is that ultra-low interest rates makes high P/Es tolerable due to the theory of alternative returns.

Finally, a lot of investors seem to be looking at long term prospects. Because of recently articulated views of well respected economists and analysts, a good number of influential investors are looking not just at 2013 earnings growth but also 2014. If they are correct and the underlying economy does grow as they expect, then valuations on Philippine stocks are not really that high.

What I would like to stress is that portfolio managers are probably not looking at quarterly returns on their Philippine portfolios. I think to them, what makes sense is returns over the next three years. There is a big game changer to this market and we ought to recognize it.

EDC, FPH, AP, FGEN Stock Update from COL

We are lowering our earnings forecast and FV estimates for all power generation companies, including FPH which owns FGEN, to factor in lower ancillary service revenues for hydroelectric plants beginning this year as the NGCP changed the pricing structure for ancillary services. We maintain our HOLD rating on EDC, FGEN and AP, as the drop in ancillary service revenues led to a further reduction in their earnings and fair value. However, we maintain our BUY rating on FPH. Even with the downward revision, FPH’s valuation remains attractive, with the stock trading at a 15% discount to our FV estimate and a steep 29.5% discount to its market based NAV of Php145.6/sh.

• Ancillary revenues from hydroelectric plants to drop. Earnings of hydro plants are expected to decline this year after the NGCP and ERC revised its rules on the pricing of ancillary service revenue. Power plants can now choose between 1.) Selling ancillary services to the national grid on a firm basis, with a pre-agreed upon capacity fee; or 2.) Selling ancillary services on a non-firm basis with flexible pricing, but taking the risk that the capacity offered will not be sold. Regardless of the method chosen, power generation companies are anticipating a drop in ancillary service revenue this year.

• The change in the pricing structure for ancillary services will negatively affect the earnings of the listed power generation companies given their significant exposure to hydroelectric plants. Ancillary service revenues of the 130MW Pantabangan-Masiway hydroelectric plant account for around 15.7% of EDC’s and 21.4% of FGEN’s total earnings, while ancillary service revenues from the 360MW Magat and the 215MW Ambuklao-Binga hydro plants together account for 26.1% of AP’s earnings. Although FPH doesn’t own any hydro plants, it will also be negatively affected given that it owns 32% of EDC indirectly and 66% of FGEN.

• In our revised forecast, we assumed that ancillary revenue/kwh would drop to around Php2.50. As a result, our FY13E earnings forecast would drop by 4.0% for EDC, 6.7% for FGEN, 4.2% for FPH and 10.1% for AP. Meanwhile, our revised FV estimate fell by 3.1% for AP, 5.0% for FGEN, 3.5% for FPH and 7.4% for AP (see exhibits 2and 3 for details). Since there is still no certainty as to how much ancillary revenue/kwh would be, we provided a sensitivity analysis of earnings and FV estimates based on the assumption that actual revenue/kwh would be higher than expected at Php4.00 or lower than expected at Php1.50.

After reducing our earnings and FV estimates for EDC, FGEN, FPH and AP, we maintain our HOLD rating on EDC, FGEN and AP, and our BUY rating on FPH.

Due to the downgrade in our FV estimates coupled with the recent increase in share prices, capital appreciation potential is limited at only 6.8% for EDC. In fact, FGEN and AP’s share price is already trading at a premium to our revised FV estimate. Moreover, although the actual ancillary service price could exceed our base case forecast of Php2.5/kwh, our sensitivity analysis shows that valuations of EDC, FGEN and AP remain unattractive, with capital appreciation potential still limited at less than 15%.

Nevertheless, we are maintaining our BUY rating on FPH. Despite rising by 14% for the year to date period, FPH still trades at a 15% discount to our reduced FV estimate. The stock is also trading at a steep 29.5% discount to its market based NAV of Php145.6/sh. Fundamentally, we like FPH because it is a cheaper way to gain exposure to the country’s power industry given the Company’s 66% stake in FGEN and its 3.9% stake in Meralco, the country’s largest power distributor.