Chaos in Cairo

Protests in Egypt have already amassed quite a following, with an opposition figure, in the form of former IAEA head Mohammed ElBaradei, ready to take charge and unite the fragmented group of critics of the current Mubarak regime. Investors are worried that a scenario which sparked the first crisis in Tunisia, will eventually happen in Egypt and spread throughout the ME region like a domino effect. Already, a smaller copy cat situation is happening in Amman, Jordan and it has not taken an expert geo-political analyst to realize that this may have a destabilizing effect on the region as a whole.

The Philippines, from my understanding, has very little trade with Egypt. With less than 7000 overseas Filipinos in the country, remittances are not exactly affected all that much by troubles there (specifically). So what's bothering the market today? Basically, its the fact that a destabilizing effect in Egypt may cause a domino effect in the region; locally the implication has no immediate effect but considering billions of dollars are pumped in through remittances from the millions of OFWS based in the region, we have quite a bit riding on the well-being of the region (in general).

With troubles abroad, my main concern today and for the past few weeks, is the health of the market and our economy. I see our government is releasing its 4Q GDP data today (I previously stated that it would be last week, I apologize for that mistake), and with the market being battered heavily these past few weeks a good GDP number would be a breathe of fresh air at this point.

As I'm writing this, a number of my favorites are taking a beating. DMC, EDC, MBT in particular. Recently, I received a report from a foreign broker that raised its price target and rating of MBT from buy to hold. This is due to higher expected earnings in 2011 and a lower PE ratio due to the recent beating MBT took. At its current price of 64-66, I would like to post my fearless forecast of this stock reaching the 80s level within a 6-12 month period. Lets just hope this whole fiasco in Egypt boils over soon.

Sticking to my guns

So the PSE had a pretty decent rally yesterday, although I think it was more of a case of bargain hunting than a real rally spurred by investor optimism. Value turnover yesterday was not as much as you would have expected from the 3rd-4th quarter of last year.

The market has been mostly red today and I think the trend will be more or less the same for the next couple of weeks or months. The government will be releasing GDP data for the full year 2010 tomorrow, with economists expecting the government target to be breached by at least a full percentage point. If the data indeed touches the 7-7.4 percentage mark or goes higher than that, I expect the market to react with frenzied buying tomorrow. There may be a downside due to the bombing in Makati and the subsequent reactions people usually have after an event like this.

With all this volatility in our market, I see it as a great buying opportunity. I've started to slowly accumulate some of my favorite stocks, with the expectation that our market will bottom out soon enough and trade at a certain range. I have my eyes set on companies with solid fundamentals with a premium put on growth prospects; AP, DMC, EDC, MBT, SCC,and UBP. These companies have taken a beating and have been, in my opinion, oversold for some time now. I'm looking at these stocks and with numbers like the ones they do, I would rather slowly accumulate and stick to my guns. "You can never keep a good stock down"

Portfolios and the pain in having them

I just got off the phone with a friend of mine asking me how I felt during the last financial crisis; the tone of his voice suggested panic and I can understand how a lot of people may feel that way. I received 5 phone calls today; two asking if they should cut losses, two asking where I see the market going in a couple of days, and one asking if it would be a good idea to invest in bonds instead.

I can't exactly tell where the market is going in the next few days. But what I do know is that our macroeconomic numbers seem solid enough. A lot of investors, look towards gains in a matter of days/weeks. I would suggest a more fundamental/long-term approach towards stock trading if you start sweating everytime you turn on the monitor. One way to digest all this is to look for your personal comfort level. It may be the percentage of loss you are willing to take before cutting losses or even buying into more solid companies and just leaving them unmonitored. Whatever it is, take comfort in your trading strategy, one that you've developed for yourself.

It may seem painful enough to have to go through seeing your portfolio turn from green to red at this point but truth is, if it was that easy then everyone who's in the market should be a millionaire by now.

Mood Swings

I'd like to think that with so much volatility (not uncertainty) in the market it would be prudent and wise to actually consider having cash on the side. I'm not talking about selling EVERYTHING at a loss nor am I telling you that my views of the market have made a complete 180 and I feel the market is going south in the long run. On the contrary, what is happening with our market is a healthy, although prolonged, period of consolidation/correction; which to me is more of a signal for buying opportunities.

Some people have considered range trading and although I am not entirely against that strategy. It would not be something I would recommend to the faint of heart or to those who do not have time to monitor market action. There are a few things I would suggest that can take the edge off the anxiety. These may not be overnight solutions but in the long run, this can be beneficial to your overall trading strategy/nerves.

1. Do YOUR homework! The reason I capitalized YOUR is because a lot of us simply read one or two reports/blogs/forums/whatever else and conclude that this is either a buy/sell/hold. That is not your homework not by a far cry. It is someone else's and you have simply tagged along for the ride. What numbers are you comfortable with? Does the company have those numbers? What kind of business is the company engaged in? Do you have any idea how these businesses are run? What potential risk/rewards can you get from this company?

2. Set aside some cash. If you don't have any at this point, it's fine take comfort in knowing that you've done YOUR homework and that the companies you have done research in are good solid companies that will bring results in the long run. If you have not done your research, it's a lesson to be learned. Forget it, move on. Hope for the best and cut when you can't take any more.

3. Keep in mind value and price are two different things. Determine the value and buy at a price.

4. Emotions. I've been an avid reader of Mr. Gus Cosio's blog ever since a friend of mine introduced me to him and although my views may not necessarily toe his line all the time. I am in agreement with how he describes emotion in the stock market... your enemy.

Recently, I've been told by a friend of mine that he's been holding on to one particular company for quite some times, DMC. It surprised me more than anything else how quick profits have changed views of certain people. He imagined a long-ish hold to be a matter of months. Quick profits changes people's perspectives. Again I am willing to stay bullish with this particular company, DMC. It's got good growth potential with a diversified portfolio ranging from construction, real estate, mining, power generation, utilities. The numbers provide for a very convincing buy; low PE ratio, EPS growth over the past years and consensus estimates' for the coming years, good dividend policy, and much more. Intangible factors provide for good investment as well; management, potential IPO of subsidiaries, etc. So I'm very comfortable staying with DMC. Its currently trading at 33-ish not bad for a company I've previously said "I would be a buyer even at 40". But hey don't take my word for it; do YOUR homework.

Taking advice

I remember when I started trading a few years ago, just when the stock market was peaking in 2007, I invested in four companies that i thought made sense to me. MBT and BPI simply because I have been a client all my life and that they seem to be so high up there that nothing could possibly go wrong. I invested in MEG just because buildings were rising everywhere with "MEGAWORLD" on its banners. Lastly, I also invested in COAT, back then i believed COAT was one company you cant go wrong with due to its push for biodiesel as an alternative to fossil fuels. Buying them was of course an advice from a person who said "buy into a company you are willing to own". Although I did not hold on to these companies for long, I think it's quite obvious how my lack of preparedness for the stock market cost me quite a bit. I bought my first stocks on expectation that they would grow without any fundamentals to back up that idea.

After trading away all my first batch of companies, I decided to chase tips (the norm just when the index was about to crash). Friends were telling me to buy PA, BEL, etc, etc. Companies that made no sense to me at that point not because I knew their numbers were bad, but because I didn't have the numbers when I traded them. And just when we were starting to make progress, the crash happened. Everyone seemed to be in panic mode and again I was left with whatever I could salvage (which at that time, was 50 percent of what I started with). All this was again from people who advice-d me to do this or that.

Now I'm not here to blame people who have given me advice and have left me losing money. If there's anyone to blame it should be myself, I jumped right into something I have no understanding of. I believe I learned from that episode and have managed to incorporate that perspective into my trading strategy.

The reason I mentioned all that was because of the recent price surges in companies that have laid dormant or have underperformed the market. SMC, PCOR, CYBR, etc and I have absolutely no idea why they are moving as fast as they are. I don't understand how a high PE or low-growth potential can make a company attractive to an investor. And unless I can justify investing in them, I don't see why I should. Although it has been tempting to ride the wave its just counter to all the rules I've managed to establish for my trading strategy. I imagine some of these companies' followers have their reasons to invest in them and I congratulate them on their earnings, but buying into something I don't quite understand just doesn't sit right with me anymore.

There were two lessons that I learned from my stock market crash experience.
1. Establish rules for yourself and don't compromise
2. Take every advice with a grain of salt

Those two lessons have helped me rebound from my losses and have earned me a more than substantial return in the past 2-3 years.

On another note, SCC has surged above the 200 mark and is now currently trading at a 210-214 range. It must be noted that this company is expected to post a substantial increase in profit due to its Calaca power plant project coming online for a full year. Both Citisec and First Metro believe the company will post a more than 80 percent increase in profit in 2011.

Macros

When the market drops close to 200 points in a matter of two days, it gives you time to pause and consider your options. A lot of people are in the opinion that a bigger consolidation, one that will drive the market to below 3800 is looming; others are saying that the market cannot go further south and its a great time to buy; while others are right in between. At this time, I see no reason to put all my eggs in one basket and I would rather set aside some cash.

I am in the opinion that the bull run has not run its course and that what we are currently going through is a mere speed bump. The macroeconomic numbers point to a great deal of optimism in our current environment. Net money inflow in 2010 has grown 1000 percent compared to 2009, remittances continue to come in in greater volume, and our economy may have grown an estimated 7 percent this year (one of the best numbers in the fastest growing region in the world, Asia). So what does this mean for us, those who have invested in equities. Strong economic fundamentals will eventually translate to better corporate earnings as companies try to keep up with consumer demand for goods and services; whether it be food, electricity, prepaid cards, or banking services for their hard earned money.

Just recently, I managed to cash out on SCC and MBT when it hit new highs at 195 and 75.05, respectively. And now my strategy seems to be paying dividends. I managed to re-enter both at an even cheaper price and am currently in a stronger position compared to say a week or two ago. I am still in the opinion that both these companies have some way to go with SCC looking into developing its 600 MW brownfield project (with work expected to start in late 2011), increasing power generating capacity by 200 percent from its current 300 MW. MBT's 52 week high was 81 that's a good 20 something percent from today's closing of 64.1 pesos per share. Bear in mind, MBT is a sectoral leader (#2 Philippine bank in assets).

I've also recently began to study EDC and I have acquired a position in the company since it traded at 4.9 pesos per share; the stock has been trading between 4.31-6.55 the past year or so and has a relatively average PE ratio (average locally, low regionally). A lopez led-company, much of its power generating company is based on geothermal sources; so unlike other sources of energy it is unaffected by weather conditions such as El Nino, it is also unaffected by commodity price increase such as coal and oil. Besides the fact that it is is a green power generating company, this company seems to be very well-liked is because of the power supply shortage in the Visayas region. I know JP Morgan has set a TP of 7.85 and other brokers have set either a buy/overweight/or accumulate rating on EDC.

The banks of 2011

Philippine banks without exception have been performing better than expected for the past couple of years. MBT, PNB, UBP, just to name a few have outperformed the PSEi last year and are expected to do so again this year, with so many of them with still below sectoral average numbers. Another reason I seem to like banking stocks are for their consistent dividend yields (many, not all). There are two banks I'm holding on to for a bit UBP and MBT, and here are my reasons.


UBP, as mentioned before, is one of my portfolio's core stocks. Its dividend policy has been consistently 30 percent of net income of the previous year, which puts this year's to a minimum of at least 3 pesos, in comparison to last years. On top of that, the bank is aiming for a better 2011 compared to an already amazing 2010. Amazing, because it has outperformed a lot of analyst's estimates. ATR Kim Eng expected UBP to post a decrease in income, instead its 9mo performance has already outpaced its full year 2009 by around 30 percent. Other fundamental numbers such as a PE of 8-9ish, P/BV of 1.1x, a decent ROE, all of these below the financial sector's average. And since its an aboitiz company, I do hope that AP, AEV, etc's earnings trickles down to UBP. The only downside UBP seem to have is that its lightly traded for a banking stock, its off the radar of a lot of traders and big time institutional buyers.

MBT seems to be swinging up and down quite a bit lately. Maybe its the recent stock rights offering (SRO) or maybe its the general sideways direction of the market. Unusual, for one of the Philippine's leading banks. It reached a 52 week high of 80+ and dropped to as low as 62 after the SRO, it climbed all the way up to 75 a week or two ago and as i type this entry down its currently at 67-68. I purchased a few shares a month ago at an average of 64 and sold at 73 and 75. I am more than willing to enter MBT again after it breached the 70 pesos level and I'm willing to purchase more once it touches 65. My confidence in MBT is with its story, a leading bank with strong growth potential; very few of those in the Philippines or the world. Its fundamental numbers are actually decent as well; a consistent dividend policy and solid EPS growth. A number of analysts have estimated MBT to be worth at least 80 pesos.

The market seems to be trending downwards after a good week, I guess taking some profits from my positions last week is paying off. I've never been comfortable with such astronomic increases by individual securities or the index in general. I learned my lesson the hard way in 2007-8. Last year's 3rd quarter rally was incredible and it gave a lot of traders very little room to breathe and assess what was actually going on. I guess in the long run, this will serve as a very good lesson for people who have entered the market just recently. I'm still pretty bullish about 2011, but then again its always better to know when to strengthen your positions or go light on them.

A few stocks that I've been observing for quite some time: AP, AT, DMC, EDC, ICT, MBT, MPI, SCC, SMDC, UBP, URC, VLL! Happy reading guys!