Gus Cosio Says So

8:30am  Monday  12 March 2012

Last Friday, we – a group of fund managers from Manila, Hong Kong and Singapore - spent the day being toured around the Carmen Copper Mine of Atlas Consolidated Mining Corporation (AT) in an observation trip sponsored by MacQuarie Philippines.  When I first started to look for work in the mid-70′s, Atlas Consolidated was one of the more desirable companies to work for.  It was consistently within the top 5 corporations of the Philippines and was the owner of reputedly the third largest copper minee in the world, the largest in Asia.  I never got to work for the mining industry, but there was a sense of fulfillment in me to have gone to a place that I had read so much about many years ago.  Moreover, the information and insight that one gets in visiting a mining project with the magnitude of the Carmen mine is something that you could not get by just reading a research report.

A mining operation is undoubtedly an enormous and expensive undertaking.  It affects so many lives, and in the case of Atlas, you could see the thousands of people whose livelihood depends on the profitable operations of the company.  From the observation decks of the Lutopan and the Carmen pits, all you need to do is count the number of gargantuan dump trucks capable of hauling 100 tons of ore, backhoes and pay-loaders that move around like ants from the distance.  The same level of activity can be seen on the mining roads where traffic controllers ensure the safe movement of these gigantic vehicles from the mine pit to the crushing bins where the rocks are crushed and the smaller pieces go into a conveyor.  These smaller pieces are then moved by the conveyor to the ball mill where the copper concentrate is eventually recovered together with by products – magnetite and pyrite.  What I found most revealing was the fact that the process was carried without any chemical process.  Everything was physical, therefore no toxic element was ever released into the surroundings.  The only outside element introduced in the process was water which was recycled over and over again.  It was amazing.

The hills surrounding of the mine pits, as well as the old mined over portions, were lush with forest cover.  According to mine personnel, fauna such as snakes and small mammals were abundant.  Hundreds of birds flew around the crushing area.  There were seedling nurseries which raised trees for replanting in the mining property.  The area was several times more lush and forested than the provinces surrounding Metro Manila.  It really escapes my understanding how environmentalists could claim that all mining companies do not care for the environment.  Urban dwellers definitely care less if you compare their behavior to these miners.

The extent that mining companies go through to extract the ore was awesome to say the least.  The proportions were astounding considering that from 100 tons of rock, you only get 2 tons of concentrated copper.  Incidentally, after further processing, a small amount of gold will still be axtracted from the concentrate.  This is the reason why a credible mining company has to raise a huge amount of capital to carry out a reputable mining operation.  The capital is used both for extracting the mineral and later to restore landscape and improve the vegetation.

I have been an optimist in as far as the local mining industry is concerned.  I believe that a great amount of prosperity in the economy can be created by mining if done responsibly.  Fortunately, these serious mining companies in the Philippines come to the market to raise capital and give the investing public an opportunity to participate in the prosperity that a mining project can bring.   I think mining stocks still present the best opportunities for growth in the Philippine stock market.

8:30am  Thursday  8 March 2012

The decline in Philippine stocks yesterday was not as violent as the drop the previous day.  I think saner emotions have prevailed.  While I do not discount further possible declines, I am not one to hastily conclude that the rally in the PSEi has ended.  I think that we are in a very healthy consolidation phase.

What I like in general is the staedy flow of domestic investors into stock either through direct involvement in stock trading or through investin in equity funds.  Last night, I conducted a seminar on mutual fund investing here in Cebu, and the venue was packed.  These were mostly young professionals who are looking for ways to invest their savings.  Of course, there were also middle aged business owners who have recently learned of the benefits of gaining exposure in the equity markets.

I remeber that in my earlier posts when tis blog started, I avered that if people with savings in this country did not put some funds exposed to the equity markets, they are doing themselves a disservice.  I still feel the same way today.  While our market has moved sharply higher over the past two months, I am still optimistic of future growth.  I was asked in an interview on the ANC last Monday about what I thought about the Philippine stock market entering into uncharted territory.  I said that entering uncharted territory is normal for stocks.  That is where a good stock should go.  aggregately, that is where a stock market go because it is precisely why people get involved in stocks – to see stock prices higher.  When stocks like AEV, AEV and DMC traded past 20 pesos two years ago, they entered uncharted territory, and where are they now?  Again in uncheted territory.  When SCC traded at 110 pesos, people again thought uncharted territory, too high a price.  Today SCC is trading above 220, doubling its price in less than two years.

Uncharted territory is where pioneers go.  It is where entrepreneurs blaze the trail because they have vision.  I believe many both locals and foreigners see a vision for the country.  That is why new issues will be coming to the IPO market, and when you think of it, an IPO is an attempt into uncharted waters.  Will these enrepreneurs be fazed?  If they had been in great fear, they would not have unlocked tha values in their companies.

I reiterate my view that this decline in stocks is a mere consoldation even if we see another 100 point decline.  The way I see it, the market is just giving us an opportunity to make more money.

8:30 am  Wednesday  7 March 2012

While waiting for my flight to Cebu today, I will pass the time sharing a few thoughts.  Yesterday, Tuesday, the PSE officials thought that since the PSEi had clearly broken through the 5,000 barrier, it would be a good gesture to have the president of the republic to ring the opening bell.  Good idea, bad result.  The index tanked close to 90 points in the next 2 hours.  It doesn’t reflect well about what stock market players thinks about the president’s market outlook. In all fairness to the president, I do not think it was his fault.

The market had been relentless not just from the start of the year, but if you look back, it started it strong climb in mid-December and has barely looked back since.  I welcome such a major correction, even if it lasts for a couple of weeks.  To my mind, a 200 to 300 point pull-back of the index will be very healthy.  It will take stock prices to more reasonably priced levels particularly the index stocks.

A catalyst to yesterday’s precipitous drop was the sharp sell down in TEL.  It was quite curious because the company was having a briefing in early afternoon which woulld disclose 2011 results.  Most investors were anticipating a dividend declaration and TEL usually gives a dividend yield which was  superior to other comparable assets.  It was unusual that heavy selling would come when people were expecting to do a dividend play on the stock.  The skeptic in me thinks that there may have been selling by insiders or parties who had early information about the disclosure.  Perhaps, someone ought to look into it just to assuage skeptics like me.

PLDT reported that 2011 core net income was down 7% to P39 B in line with company guidance but 2012 guidance was revised to P37 B which is way below analyst estimates.  What really hit the market in the chin was the 87% decline in 4Q-2011 earnings.  It is something that you hardly expect with a huge and stable company.  Nevertheless, I do not think one bad quarterly results would make me lose faith in the stock; after all, the dividend yield to be given shortly is around 4%.  Furthermore, TEL also pays another dividend in September which could round off the dividend yield to a total of 7% for the year.  Yield like that would be hard to find nowadays.

Anyway, I think the next few days would be a good time for cherry picking.  In the meantime, I have to run and board a plane.

9;00am  Monday  5 March 2012

On some days, it is just very difficult to get started on writing out my thought on the Philippine stock market.  It even gets more difficult when stocks have rallied so much on a broad front.  We are seeing index stocks up around an average of 15 percent since the beginning of the year.  Much of the second and third line stocks have also moved significantly, particularly those in mining.  Recently, oil stocks have started to move and prospects are just about as bright as mining and while the risk reward ratios are huge, getting in early in the game could minimize risk exposure.  It is times like that I appreciate comments and questions coming from readers.  These comments help give me ideas.  In fact, that is what is wonderful about the market – it is the confluence of a multitude of ideas.  The brightest ideas are not always those that make money.  Sometimes, it is the inane that dominates.

Anyway, follower Raphael asked for ”my opinion on the current price movement of MA/B?  At current prices, does MA/B present a good opportunity for short term or long term trade gains?”  My response is I think MA/B has a lot of promise.  It has its Kalaya-an property which is now part of the Philex Boyongan Project.  Studies show high-grade copper-gold porphyry deposits estimated to be greater than 100 million tonnes of about 1.0 % Cu and 1.2 gmt gold.  My thoughts for mining stocks is that if the resource is proven, then the value will emerge in the stock price in due time.  That makes me very positive on MA/B.  All you need is patience.

Benson shared this information on MEG: ”EPS estimated at P0.24/share (estimated annual EPS based on 3Qtr earnings), translate to 7.58x P:E. I am surprised that market value at present is only 89% of BV of P2.25/share. Although profit drops 20% in 3rd quarter 2011, it’s EPS is rising (2009 = P0.15 ; 2010 = P0.19 ; 2011 = P0.24 estimate base on average 3 quarters). How do you see the market price of MEG going forward?”  My take on MEG is that the stock suffers from an overhang of supply coming from the large amount of warrants issued over a year ago.  It is really a matter of supply and demand.  When the market feels that there is too many shares that are being traded, unless there is a dramatic surge in the stock’s EPS, it will usually trade on its cheap side.  I would rather trade AGI which has less of an overhang and a more exciting prospect due to the Resorts World project.

Buko Pie asked about  BHI and its long term prospects.  I can only say that this stock is a small capitalization stock andhas very little supply in the hands of the public.  As such, any large buying can really push the stock’s price higher even if there is no research information.  As to its long term prospects, I believe that more transparent opportunities can be found in other stocks for the time being.

With the index above the 5,000 level, I think many would be in a quandary of what to do.  If I had to buy stocks today, I would still stick to the index stocks because they will continue to attract the bigger portfolios in spite of their already hefty rise.  I would continue to go for TEL, MBT and JGS because among the blue chips, I think these are the cheapest.  They are probably also the stocks that would be safest from any correction.

Have a good trading week.

6:43 pm Friday 2 March 2012

With Philippine stocks rallying strongly, some of us may be quite skeptical in adding positions to issues that have gone up substantially.  What normally follows a large cap rally as we have seen is a rotation to mid-cap and small-cap shares – the so called second and third liners.  Here is something to chew on over the weekend.  This is a research note I received from my favorite stockbroker which I would like to share for whatever it is worth.

The analyst says:

“We believe that OV is currently undervalued. We see that the success of drilling and operations in Galoc Phase 2, Nido 1X1, as well as West Linapacan should support medium to long-term growth.  We initiate coverage with an OVERWEIGHT rating and a target price of P0.081 per share.  This presents a 65% upside to its current share price.  The target price is based on blended values computed using DCF, relative valuation, and the dividend discount model.”

“Developments in the upstream oil industry should bode well for participants.”

“While a small player in the global oil spectrum, the Philippines, with estimated total resources of 3,628 million barrels of oil, provides incentives for investments into the industry. Currently, there are only 28 existing petroleum (i.e. both oil and natural gas) service contracts in the country and we expect this to increase in the next decade, given that petroleum is still a basic necessity. The government has been actively encouraging investments and participation through initiatives such as the Philippine Energy Contracting Rounds which showcase contracts that would be up for bidding.

“Benefiting from higher oil prices moving forward.”

“Higher oil prices translate to higher top-line.  The upward trajectory of oil prices bodes well for revenue growth.  After looking at OV’s financials, we believe that the company also has relatively strong cost management in place.  We foresee a healthy growth in bottom line moving forward.  However, note that there exist downside risk if the assumption of elevated oil prices will be unrealized.   Actual future prices may vary from our estimates.”

These are the salient points of a research report sent to me just this morning.  According to the analyst that wrote it, much of her impressions were formed by verifying company information with available data from the Philippine Department of energy.  With oil prices skyrocketing, the economics of oil is shifting such that accessible oil fields would be promising better profitability.  As an old doughnut advertisement used to say – “it’s worth the trip.”

12 noon  Thursday  1 March 2012

The strength of the stock market with a 77 point rise in the PSEi and net foreign buying of close to Php 1 billion on Wednesday simply reflects perhaps a sustainable bullishness of equity investors who focus on Philippine stocks.  Stocks had retreated from record highs on 23 February but with less than a 200 point correction.  What we ought to see in yesterday’s strong surge is a greater commitment of funds by investors of all sizes and shapes.  My initial reaction to yesterday’s strong close was that it was month end window dressing.  However, with very strong net foreign buying, I have to conclude that foreign investors are adding to asset allocation in Philippine stocks which is a very favorable sign.

One of the strongest gains was seen in EDC, a stock that had been badly battered due to the delays in the rehabilitation of it’s Bacman generating plant.  While many would see this as perhaps the stock price having fully priced the lower earnings this year, I have become jaundiced in my view of EDC.  The way it’s management handled the Bacman problem and how they disseminated it to investors leaves too much to be desired and to me reflects the quality of EDC’s management.  While others may have a more favorable view, I would not rush back to EDC, and I would treat their disclosures with a lot of apprehension.

I would rather go to a stock like DMC which recently bagged the MRT7 contract.  DMC has a very good record lately of steadily delivering on it’s earnings guidance.   In fact, DMC has been exceeding investors expectations which to me reflects a very appropriate track record in managing investors expectations.  In addition, Maynilad in which DMC is the minority partner of MPI is expected to report record profits for 2011.  Having said that, MPI has been lagging other conglomerates and is due to catch up soon.  I think MPI is worth a serious look at current prices.

In the mining sector, a lot of the second line mining stocks have hogged the limelight so far.  The excitement will not likely go away given that there will be mining forum in Manila on Friday, 2 March and a more substantial 3-day mining conference in Cebu.  I think the mining issues should not be ignored in the face of the strength of large cap prices.  It is never too late to construct your buy list.  More importantly, it is also prudent to manage your cash and take some profits here and there to take advantage of any rotation that fund managers will do once values become stretched.

8:50 am  Monday  27 February 2012

Stocks in New York had touched their 2008 highs before pulling back.  Nevertheless, both DJIA and S&P 500 were up on the week with the latter performing better.  This tells me that global investors are diversifying out of blue chips which led the beginning of 2012 rally.   Locally, while the PSEi reached its all time high on Thursday, many traders and fund managers saw it as an opportunity to consolidate positions and take some money out of the table.  Many were anticipating that the PSEi would hit 5,000 soon, and when it almost did, people proceeded with what they were planning on doing – take profits.

The movement of Philippine stocks on Thursday and Friday may be scaring off a lot of traders for the time being.  At worst, we can expect a string of selling as short term traders bank in their gains.  I don’t blame them; but personally, I am not worried.  There are no major hurdles lurking on the horizon like there was in 2007 when the first signs of the sub-prime fiasco were ignored by the market. The Greek situation has been plaguing us for over two years now as well as the related financial problems of the rest of Southern Europe, but those have been slowly coming to resolution.  There is a potential bomb shell in the Middle East, but political instability has been around for decades and even when war had broken out in the region, the markets always recovered from it.

What we should really watch out for are the important elements that are driving Philippine stocks; and these are the investment flows. It is only now that both local and foreign funds are getting more widely involved in Philippine stocks.  Take local trust funds.  For a long time the aggregate exposure of trust funds  in stocks have been a maximum of 10 percent of AUM.  It is only recently that their asset allocation has moved up to 20 percent in most cases.  A minority are even raising exposure to the equities market up to 25 maybe 30 percent.  The magnitude of these funds flows is enormous already.  Then you have government pension funds bringing home funds that had been previously invested abroad.  This is on top of the organic growth that these funds have from continued employee contributions.  Finally, there is the increasing participation of domestic retail investors due to easy access to stocks through online trading.  All these stack up to a sizable flow of funds committed to trade Philippine stocks.

Of course, there are the foreign funds that are increasing allocation to emerging Asia particularly the ASEAN due to the pulling power of Indonesia.  What is favorable to Philippine stocks is that it is a lot cheaper than Indonesian stocks in general as of this writing.  This relative value comparison makes a strong case for local index stocks, not just for the PSEi but for the MSCI Philippine index as well.

This is one reason to be bullish on the large cap stocks even as prices pull back.  I certainly think that AC, AGI, SM, MBT, JGS and TEL are among the stocks that are worthwhile catching in this downturn.  Personally, I am hoping for another 100 points down which means another broad based decline in the market.  I must admit that this is merely wishful thinking.  At today’s level, I am already willing to accumulate index stocks.  I would avoid AEV and AP for being overvalued, and EDC, FPH and FGEN for having such lousy underlying performance and very disappointing corporate disclosure deportment.  I would much rather line up a few second and third liners as they tend to be objects of speculative interest when large cap stocks turn soft.

We are seeing very strong interest in OV and PXP because oil seems to be gaining a lot of attention.  These two companies have ownership interests in existing oil producers.  In fact, OV had been paying steady cash dividends.  Oil stocks may be speculative in nature, but that is what oil investing all about.  Oil companies take a huge risk as they spend a fortune on exploration.  In many cases, the oil find is not of commercial quantity; but when they find a gusher, the returns are enough to pay off the capital expended on wells gone sour.

Going back to index stocks, I am hoping that AGI, JGS and MBT will do some catching up today.  AGI as with BEL and LR seem to have been dragged down by the bribery scandal revealed by an ousted director of Wynn Casinos in Las Vegas.  I see no reason for that to affect the existing operations of AGI’s Resorts World.  Of course, with Belle Grande – BEL’s joint venture with LR – being in the pre-opening stage, things may still go wrong making LR a very speculative proposition at this time.  Just like in the roulette or craps tables, you can make a small killing but only after your nerves get a little stretched.  Hey, but for some people, it is worth the thrill.

JGS is historically a slow mover, but I think there has been a game changer.  There is more liquidity in JGS now because of the sizable placement made a few weeks back.  There is also the removal of the DGTL drag on earnings.  Actually, the drag is now translated to earnings because the position is now in TEL which some analysts see to gain some growth in the next three years due to  broadband and data services.  Of course MBT is a gem that has been a stellar performer.  People have just taken profits in the stock, so it is really a good time to get it back.

Anyway, today is a good time to take stock of one’s portfolio strategy.  We have seen support and resistance levels for stocks that we follow, and these data should guide us in entering and trimming positions.  I continue to be constructive in the broad market.  I think some fundamentally sound second line stocks have yet to make their big move.  There is no reason to be anxious if we remain focused on market fundamentals.

Have a good week.

7:46 pm   Thursday   23 February 2012

There are so many questions on people’s minds today with the PSEi trading as high as 4997.04 and closing at 4893.48.  The swing for the day was around 104 points or a 2.2 percent swing up and down.  Just as when people thought the market would assault the 5,000 barrier, the market not only took back the day’s gain but even eroded a good part of yesterday’s.  I think that many technical traders saw 5,000 as a nearby resistance to this rally that had its roots around November 2011 when the index was around 4,200.

Here is an analysis shared by one broker/analyst who traded very heavily today.  This should also answer questions bugging the holders of stocks like DIZ, OPM and OV.

Essentially, the spark of the sell-off was AEV due to a market talk of a possible merger between UBP and BPI or RCB.  Given the wide bid/ask spread of AEV, the stock rocketed to Php 59.9 contributing 56 points to the index and the PSEi hit all-time high.  Some analyst had placed AEV’s NAV to be around 60 should UBP end up in a merger at twice its book value.  It is not unusual that when a target price is reached, both swing and arbitrage traders would start to sell.  Similarly, the sell targets of foreign algorithm traders were likely triggered.  The price which was .10 shy of 60 was too attractive to resist prompting the drop since the rise in AEV appeared to have been exacerbated by the speculation of a merger.  UBP swung from a low of 90 to a high of 125 putting AEV completely out of whack.  The move in AEV gave the rest of the market an excuse to take profits simply because so much profits have been made in all sectors of the market.  Of course, in a profit-taking sell-off, hardly anyone is spared.  Stocks that have been trading at their all time high – and there are many of them – were sold as both traders and fund managers moved to protect earlier gains.  Practically all index stocks –  ALI, BPI, SM, BDO, SMPH, DMC, ICT, JGS, MWC – ended in red.  Only a few like AC, MBT, PX and URC remained green although they traded much higher in the morning.

Remember, we closed 2011 at 4372, and today’s high of 4997 was already a 14.3 percent YTD rise; and February is not even over.  In my opinion, this is a very welcome correction all around.  I think traders and even fund managers were already ignoring values and were simply buying in order not to be left behind.  With a profit taking move like today’s, most sane investors will bring their analysis closer to reality and not merely rely on the liquidity that has so far been driving the market.  This should also give those who were not able to chase prices a chance to enter the market or increase their investments at lower prices.  We have seen major corrections of rallies before and they only serve to make future price gains stronger.  After all, it is the soundness of the markets fundamentals that enable values and prices to emerge.  I believe the economy’s fundamentals remain intact.

What does this do to theme stocks in mining and oil such as DIZ, NI, ORE, OV and OPM?  Inevitably, prices cannot just go one way.  The trend is your friend, but trends normally gets sustained when healthy corrections occur.  In fact, stock prices are able to push further when price supports get established when swing traders make their exit.  NI for one was not badly affected by the sell-off since it appeared to have been consolidating its very strong move from the beginning of the year.  ORE in fact closed 2.74% higher today which is a reflection of the buying support by investors for this stock.  The move of DIZ has been relentless over the last three weeks with phenomenal rises over the last few days.  I think the profit taking has done it good because the stock has a very firm base of investors and the slippery hands have been squeezed out by this correction.

For OV and OPM, I think those who went into these stocks were looking to the second quarter of the year for the bigger move to come.  This is when exploration and drilling activities would commence.  Oil stocks in any country are always volatile especially those which are involved in exploration.  Those who trade this sector must understand this.  There is risk and there is reward, but in oil stocks the swing of risk into reward is usually wide.  My view is that the sector has just started its move, just like mining started its move last year.  The horses have just left the starting gate.  When you bet on a horse race, you psych yourself up that you placed your money on the right horse.  If you win, the pay-off is high; but if you lose, you have nothing left.  In betting on oil stocks, your pay-off could be as high; but if it does not work out, you still have money left.  The risk reward ratio is not so bad after all.  Nevertheless, the risk of losing is real; that is why we also have to get real.  Personally, I think the race is still being run on OV and possibly OPM; however, it is not for the faint of heart.

7:20 pm  Wednesday  22 February 2012

Yesterday, European finance ministers reached an agreement for an aid package for Greece that includes a 53.5 percent write-down for investors in Greek debt but shields Central Bank lenders from haircuts.  The deal brings to at least 386 billion euros the sums spent or committed to save Greece, Ireland and Portugal from bankruptcy, and to insulate Europe from financial disaster.  Asian stock markets were mixed today, but most European markets are down as I write.  It seems that the Europeans are selling on news.

Philippine stocks continue to surge but I sense some rotation going on.  Ayala stocks – AC, BPI, MWC and GLO – were down.  Only ALI was up.  Among the Henry Sy stocks, SM, BDO and BEL were down while SMDC and SMPH were up.  Aboitiz stocks AEV and AP rose strongly but UBP tanked sharply.  Gokongwei stocks JGS and URC rose while RLC remained unchanged but CEB came off.  Among the banks, MBT and SECB were down while PNB rose.  Even the mining sector is having a mixed performance with recent strong performers NI and ORE down while DIZ has not just rebounded but appears to be headed past the ceiling.  BC, MARC and NIKL also appear to be attracting buyers.  LC/B and MA/B looks like market is ignoring them for the time being.

With the index hitting an all time high again, it becomes more difficult for some to enter the market buying the large cap shares.  This is why rotation makes sense because it gives a chance for some stocks to consolidate while laggards do some catching up.  This also puts some focus on special situations in the usually speculative oil sector and we are seeing OV, OPM and PXP getting a lot of attention from both institutions and speculators.  Oil stocks are more volatile than mining stocks because of the risk reward nature of oil exploration.  OV has steady earnings and pays regular dividends that is why it has become the object of widespread participation.  The high reward is expected when exploration starts in the following months given that the prospects of a large oil deposit find are very optimistic.

The bottom line of all this comes down to the fact that investors are really chasing after returns, at least for the time being.  If we look at the fixed income market, the Philippines sold PHP16.316Bln 15Yr Bonds at an average yield of 5.008% and  PHP33.3 Bln 20-Yr Bonds at an average yield of 5.285%.  The risk reward ratio is really shifting heavily to the stock market.  Economic fundamentals are also favoring equities with the balance of payments in surplus again in January and  foreign reserves rising to $77.358 Bln from  $75.302 Bln in December 2011.

Personally, I will go with the flow meaning, I will follow the rotation and take profits in some stocks and redeploy in laggards.  Perhaps that is what is going on in NI and DIZ – those who have made a lot in NI have shifted to DIZ and are making another bundle.  It will not be long before we see the flow coming back to NI again and perhaps even ORE.  The thing about a bull market is it puts money back into the hands of investors which in turn emboldens them to re-invest in stocks that they have made money previously.  People will always be comfortable with stocks that they are familiar with.

UPDATE 9:54am

A few comments have been made and questions asked about DIZ.  The stock has gone up quite a bit and people are asking themselves if this move is for real.  My take on the move is that DIZ is a small cap stock meaning that when big block buyers emerge, the supply gets squeezed and the price goes higher.  The question people should really ask themselves when buying the stock should be whether they are buying simply on momentum of the price movement or are they convinced that the stock indeed could achieve higher values.  With mining stock, particularly gold producers, the value will be strongly correlated to the outlook on the gold price.  It looks to me that the move in DIZ is suggesting that investors are pinning their hopes that DIZ will be striking gold soon.

7:35 pm  Monday  20 February 2012

The Philippine Stock Exchange Index (PSEi) traded at the all time high today after what seemed to be an all time high already last Friday.  We seem to be moving farther and farther into uncharted territory as far as the Philippine equities market is concerned.  The big question on people’s minds is will this rally continue or will we be up for a major correction.  Investors always get wary when stock prices begin to trade  at levels seen before.

In my view, I think stock prices will definitely go higher.  In fact, many of the index stocks are not yet past their all-time highs.  For one, AC which closed at 404 today, had traded at a high of 447 (adjusted for stock splits) in 2007.  TEL traded at a high of 3285 also in 2007 and is only at 2826 today.  BDO traded as high as 73 in 2007 while MPI traded as high as 7 in 2009.  I think the notion that because the market has broken new ground, it cannot go further is a very myopic view.  It is not the way an investor should think.

An investor should be forward looking and would constantly assess fair value of the stock along the way. Investment activities are endeavors that always require future oriented thinking.  Of course, we cannot ignore price actions in the past since they serve as sound guidance for decision making.  However, we must bear in mind that history is made up of events that never happened in the past.  When Magellan sailed for the Philippines, he went through a vast area of uncharted waters, but the idea that there was the prospect that a reward was forthcoming because of his assessment of the probabilities that lay ahead.

I think investors both locally and globally are valuing things differently nowadays.  Again, they may be right or they may be too optimistic.  The out come would be how patient they would be in waiting for their assumptions to emerge.  Right now, a good number of foreign investors just want to have exposure in the Philippines because of the country’s prospects.  Whether stocks are expensive or not matters very little when there is a large amount of demand pushing prices.  I think investors should just go with the flow and stay with it until stock valuations become ridiculously high.  That possibility will occur when company results disappoint down the road.  Right now people are willing to bet that it wouldn’t.  My view in all this is to stick to the basics – buy the stocks that are still reasonably priced based on sound future assumptions.

Foreign funds appear to favor banking stocks as an indirect route to a Philippine infrastructure play because the banks will increase earnings by financing infrastructure projects.  We saw BPI, BDO, MBT, PNB and SECB do very well today.  It also seems that VLL may also be an infra beneficiary because of the Daang Hari new access toll road to SLEX.  Of course DMC and MPI remain to be the major infra players.  EEI could be a second line choice simply because EEI lacks liquidity.  Personally, I think holding companies are good buys, but AC is already expensive.  If one wanted a similar exposure, JGS would a an excellent choice because like AC, JGS is also in real estate development including mall operations, telecoms, and banking.  More than that, they are in food, transport and manufacturing.  Some analyst place the net asset value of JGS at 34.

A reader asked if TDY was worth a look.  My answr is a resounding yes since TDY is second only to Bacardi in global rum sales.  They have ample room for growth as they embark on an export push which positions their rum as an excellent mixer for a variety of cocktails.

For those who follow mining stock and have asked about LC and MARC.  Well, I think you buy LC for its huge mineral resource prdominantly gold.  You get into MARC for the production track record that they showed in 2011.  I would view ORE in the same way since they were able to bring nickel production into higher gear in 2011 and are looking to double production in 2012.  For followers of NI and DIZ, it seems that institutional buying of these stocks have taken a lot of supply out of the market.  I can believe that thes stocks can pull off good earnings results in 2012 to satisfy these foreign investors.

Let us be clear on one thing:  we are in a bull market and when the tide rise, every boat rises with it.  The question that should pre-occupy you is which stock to buy and not when to sell.  When I started this blog, I said that the Philippines was in a long term bull trend.  You will not be doing yourself a favor if you are out of the equities market.  If you have a tough time deciding what to do, I suggest you buy an equity exposed fund because equities is really the asset clas to be in for the next 3 years.