Juan Liners: Throwback Sunday on Select Stock Prices Then and Now

Suddenly felt like doing a TBS: throwback Sunday or throwback stocks. Or some select stocks close to my heart and what their prices used to be (years or months or weeks ago) and now.
The Philippine stock market is once again gaining popularity with the bullish run towards 6800, with more and more newbies joining FB groups to ask around how it’s done, and more OFWs wanting to trade and/or invest and have a piece of the action. 

With the renewed interest from a wider “fan-base”, is the time to sell once again approaching? Sell in May and go away?

Caveat first. These TBS do not recommend a buy or sell rating. They just present some fun, cool, amazing or scary facts. The price movements described here may have taken years or months only, and I will no longer mention whether any stock dividends, stocks splits or follow on offerings along the way occurred, all of which could have affected the stock price one way or another. Who knows? The stocks right now may already be overvalued, or maybe not. So basically, it’s just a then and now.

Double Dragon (PSE: DD): IPO price at 2, with the run to 3, then 4. Rested a few days, reached 4.97 then a high of 7+ before closing at 6.7. I’d say this one’s exceptional, making all this run in less than a month. Hyped? Jockeyed? Fundamental? I leave it up to you. But as the traders say, the trend is your friend so regardless whether the run will be sustained and will last or not, as long as there is momentum, a killing can be made. For the brave of heart and risk-takers that is.

Meralco (PSE: MER): This happened years ago  when MVP and RSA suddenly had interest to acquire MER from the Lopezes. Trading at 40s only back then, the price shot up drastically. Now it’s trading at 273.

Megaworld (PSE: MEG): One of my favorites when I started investing in 2007. Trading at near 2 levels back then. Now it’s trading at 4.68.

Alliance Global (PSE: AGI): Another favorite. Back in global recession, this used to cost 4 each. Now, less than a decade later, stock price is now at 30.40.

JG Summit (PSE: JGS): Back in global recession, this also used to cost around  4 each. Now, less than a decade later, stock price is now at 50. #boompanes

Jollibee Corp (PSE: JFC): Price used to be at 40, then now it’s 174.

Manila Water (PSE: MWC): First stock I bought in 2007 priced at 16. Dropped to 10 during global financial crisis, now at 26. I’d think this is still affected by the regulatory issue it’s facing on tariff rates hence the price overhang. But once it gets resolved, plus the expansions in Boracay and Vietnam…

Philex Mining (PSE: PX): Just a couple of years ago, this gold miner was trading at 16. Disaster struck and it sustained damages in its spillways, incurring government suspension, operations stoppage and fines. It has been regularized and fixed since but prices dropped to 8 levels. Now threatening to break 10.

Bloombery Resorts (PSE: BLOOM): Reached 33 levels when news came out that the stock will be used as backdoor listing of Solaire owner Bloomberry. Dropped to 16 then to 8 levels. Now at 11.88.

Lessons? I leave it up to you. It was just fun reminiscing.

Asset Price Bubble Imminent? Oversupply of Condominium Units?

Read an insightful article on Inquirer asking whether we are again headed to another asset price bubble due to the booming property development (and seemingly oversupply of condominium and office space units). Read full article here.

Also, last year, I wrote about the increased visibility of SMDC (PSE: SMDC @ 5.95/sh , price back then was 8.38) along EDSA as they acquire prime properties for their SM Residences (and display their gigantic red and yellow logos). Well they haven’t stopped and construction in a number of sites is ongoing, not just along EDSA but in Makati, Global City, Ortigas, Mandaluyong, North Avenue, down south in Pasay, Bicutan, Paranaque, etc.

And the condominium construction craze (3Cs) is not just limited to SMDC. Empire East (PSE: ELI @ 1.08/sh), sister company Megaworld (PSE: MEG @ 2.80/sh), Ayala Land and affiliates Avida, Amaia (PSE: ALI @ 25.05/sh), DMCI (PSE: DMC @ 52.90/sh) and other developers also have lots of numerous projects ongoing (Robinsons Land (PSE: RLC), Filinvest (PSE: FLI), Vista Land (PSE: VLL), Century (PSE: CPG), Cityland (PSE: LAND) etc) all over Metro Manila and nearby areas.

Questions are, is demand still there for these units which will finish 2014, 2015 some even up to 2017? And is the property market heating up so fast with all these investment activities that anytime soon, price increases may just burst and do a free-fall?

Growth To Continue

Per the article, companies have been enjoying increased sales of units in the past few years, supported further by the growing economy and increased bank appetite to lend on real estate via home loans. Default rates may be increasing for the banks but remains on a manageable level, and since loan is secured, a secondary market for repossessed properties is another mitigant.

This party is expected to continue in the next few years. BPO offices and OFWs remitting money to the country are the leading consumers of the properties being constructed.


Bubble Imminent?

The article clearly pointed out the price increase does not always equate to price bubble. What we need to watch out for is excessive lending and selling. Excessive lending to those who can’t even pay, and excessive selling to those who do not have capacity to pay the amortizations for the long run, or to those who are into speculative purchasing.

Developers usually offer easy down payment terms at 0% for 24-48 months installment. Credit checking here is not that strict since in the event that you are no longer able to pay the down payments monthly, you lose the property (developer sells your unit to other customers and developer profits from your past payments). But for those who are able, this is an attractive offer since payments usually range from Php10k and below monthly. This way of selling is very enticing to the average consumer.

After this down payment portion comes the heavier part, when one will already need a home loan financing to pay for the balance portion of the property. Here banks will have to be more prudent, discerning and judicious in approving the home loans. Down payment amortizations of Php10k may translate to Php15k to Php20k a month in 3-4 years time once the customer is now paying the home loan. This is crucial as well for the customer since s/he should not only assess capacity to pay the down payment, but more importantly capacity to pay the home loan 3-4 years down the road.


Market Becoming Speculative?

Yes it is true that Filipinos generally still buy properties to live on them and as investment, rather than as speculative purchase and for resale once prices go higher. But Filipinos are also not financially illiterate, as there are now more and more Filipinos who buy and sell condominiums just to take advantage of the price increases. I’m sure there are more now than before.

Domino Effect and Regulation

Should a bubble occur and should it burst, then banks will be the first one to be affected since the customers will default on them. The economy will soon follow given tighter lending criteria from banks (less liquidity and credit, less economic activity), and fear from the market to spend given the uncertainty of the times. Developers will also have their share of unoccupied, unsold excess inventory of units. This has happened before in the Asian Financial crisis, hopefully this time, the Philippines is able to avoid it. This early BSP has already set in, putting a cap on how much banks can lend to real estate as % of their loans portfolio.

Regulators and market players all agree that a bubble is not yet imminent and not too probable, but acknowledge it as an ever present threat. Hopefully our market now is more mature and more responsible. As we have seen, even the first world countries fall to these traps, what more ours that is still developing?

PS. No endorsements and advertisements intended for stocks and brands mentioned in this post.

Quick Stocks AFS (Financials) Analysis From Peter Lynch

Peter Lynch taught me a lot on stocks fundamentals, on how I should use what I know to earn money from the stock market. In his One Up on Wall Street, he gives a lot of tips and advice and learning points that transcends the US market, that are very much applicable to our young Philippine Stock Market. In this post, allow me to share some of the things I learned from him, focusing for now on a quick drill on how to read a company’s financial statements, and find out whether the company is worth investing into or not. What are the numbers that matter (Chapter 13 of his book) and how to read them?

 +1. Market Capitalization

This is not among Lynch’s list but I believe this should be here as well. Market cap is simply share price multiplied by total outstanding shares. This is basically the company valuation, how much the company is worth in the eyes of the market. This will not be equal to the total assets  or equity of the company since it already considers all the future growth or events that might happen to the company (forward looking as they say). But if ever they are close, then chances are you found a reasonably priced stock. Another helpful tool is compare market caps of competing companies, see who’s leading in market share and see if the same is true in terms of market caps. Also, for the conglomerates (e.g. AC or AGI or JGS), it will be a good exercise to check the market caps of its subsidiaries (e.g. GLO, ALI, MEG, GERI, McDo, URC, DGTL, CEB) to see whether if conglomerate market caps are still within sane levels when compared to the sum of its parts. 

1. Net Income and Margins

Of course, the bottom line, the profits. With every AFS released, our main concern is whether the company made money, and if it was better than the last statement. We hear it all the time, profit estimates and targets from companies and outsider investors alike. Lynch pointed out that it will be pointless to compare net income across industries, but it will worth doing within the same industry, compare the competing companies. We should not just take the net income figure on a nominal value. Instead, we should look at profit margin, or net income divided by total revenues (or sales). This figure will show you the most efficient company, the company who spends the least to get the greatest revenue. The higher the profit margin, the better.

 

2. Cash Position

Cash is king, and if there’s a quick basis on how wealthy (and hence valuable) a company is, then the company’s cash is the best place to start. On the AFS, add all ‘cash’ and ‘cash equivalents’ and subtract from this sum the company’s debts. This is the company’s net cash position, and dividing this nest cash by total outstanding shares and you get net cash per share. This is how much the company value is on cash basis alone. So if a share price sells at P10 but a company has cash of P6 per share, then that means 60% of your investment is already covered by cash, and you are just risking P4 per share. Peter Lynch calls this bonus, I call it discount. Having the actual net cash per share beats all speculations on future growth and prospects, etc. A big net cash per share also means you are getting the stock price at a big discount, and now it is up to you to gauge whether the discounted stock price is undervalued or still unreasonably high. 

 

 

 

3. Price / Earnings Ratio

More famously called the P/E ratio. This is computed as the stock price divided by earnings per share. In turn, earnings per share is computed as net income divided by total outstanding shares. In principle, PE ratio is the ratio of how much the stock is valued in the market vis-à-vis how much that stock earns. For Peter Lynch, the PE ratio should be equal to the earnings growth rate of the company. If more, then the stock may be overvalued, if less then you are getting the stock as a discount.  In simpler terms again, the ratio is the number of years it will take for you to recover your investment, assuming earnings growth rate is constant (caution this a big assumption). For example, if a stock is priced at P10, and earnings per share for a year is P2, then PE ratio is 5. If the company gets earnings per share of P2 a year, then it will take 5 years for you to recover your investment of P10. Note the assumption that earnings per share remain constant. Upside on earnings growth, big recoveries, or lower income for the year are some things you need to consider together with PE ratio. Likewise, some analysts also compare PE ratios of the whole market, and the close competitors, to see if a certain PE ratio is within reasonable levels.

4. Debt-to-Equity Ratio

This is simply the sum of short- and long-term debt divided by total shareholders’ equity. This shows you how much the company owes vis-à-vis how much it owns. Very low ratio is perfect while very high ratio is troublesome. Remember that as a shareholder,  you will be the last ones to be paid by the company, and that debtors have a higher priority. As such, if a company is buried in deep debt, then I suggest you be careful and see if the company has rosy chances to pay these off. If very little debt, plus lots of cash (see #1), then you hit a jackpot! How to find a healthy DE ratio? Peter Lynch quotes 25% but it won’t hurt to compare once again with competitors (e.g. DGTL vs GLO vs Smart portion of TEL).

5. Percent of Sales

Or we can also adjust this to percent of subsidiary market cap or income for holding companies. Back to sales. Say you noticed a star product selling like hotcakes, and you wanted to invest in the shares of that company. Then I suggest you look at percent of sales provided by the star product that intrigued you to the whole revenue of the company. To localize an example, let us assume that you noticed that cheeseburgers and Smart Bro and Sun Unlimited Call and Text have become a hit lately. Then the next thing to check is whether cheeseburgers are driving AGI’s sales, or whether Smart Bro is a big chunk of TEL’s business, or how much of DGTL income is from Sun Unli Calls and Texts. Other examples will be how Gold figures in the sales of mining companies such as PX, LC and AT. I’m sure you’ll find varying numbers. This ensures that the star product you have seen, is not just a drop in the bucket in the sales of a company.

6. Dividends

Dividends are steady income streams that you can get from the companies, assuming of course that they pay this out, through the good times and the bad. For me, dividends is how company shares its income with its shareholders and investors, without sacrificing the liquidity needs of the company.  Though one can argue that the company is better off using the money for dividends into more productive use such as expansion. Lynch tells us that if the stock is a slow grower, a company that is already too big, and not much room to expand, then dividends is really a plus. But for a young stalwart company with so much promise and rosy prospects, then a dividend is not really necessary (use it for further expansion) but a welcome add-on nonetheless. One should check though whether the company has always paid-out dividends, whether it pays out increasing, consistent or decreasing dividends. Also, dividends is not just about cash dividends, but also stock dividends, stocks splits etc.  The dates on dividends also come into play with the short term pricing of the stock. See my related post on dividend basics here.

7. Growth Rate

Very critically tied to #1 and #3 above, growth rate of earnings (net income) shows that the company and its value is growing. And if the company value is growing, that means the stock prices ought to grow too. Increased sales does not always lead to increased growth rates. Company expansion does not always mean growth in income as well. Here is where the profit margins come into play. If a company gets more sales or expands to new markets, then it has to have a very good profit margin to support growth in income. Note that every move of the company entails costs, so the better they get to manage the profit margin, the better the income growth rate will be. Lastly, it will also be good to compare growth rates of competing companies within the same industry, to see not just who’s growing obese, but who’s growing healthily.

8. Cash Flows

By cash flows, we mean positive cash in-flow. This time, this is very much tied to #2 which is the cash position. Of course, what is good is there is more cash that is coming in compared to the cash that is coming out. Capital intensive companies (e.g. mining, infrastructure, real estate development) and those that invest a lot at this time will surely have challenged cash flows. But lucky you if you encounter companies with very rich cash in-flows. Lynch also computes a price to cash flow ratio wherein the stock price is divided by the annual cash in-flow of the company per share. This should mean that with the stock price you are paying, this is the amount of cash that comes in.

9. Inventory

For Lynch, if an inventory builds up, especially for retailers and manufacturers, he considers it as a warning sign. And if inventory build up is faster than sales growth (especially if there is no anticipated future sales growth like seasonal or new big customer), then that is a red flag.  Just be cautious though with how an inventory impacts the company. Inventory for a retailer / manufacturing company is definitely more important, compared to say a bank or a hotel. Also, one needs to check whether the inventory is perishable, has a high salvage value, or is practically worthless if taken outside the context of the company. For example, aluminium sheets and precious metals definitely has value even if stocked up for a while, compared to finished jeans and Christmas cards and canned tuna.

10. Asset Play

Another tricky number to look at will be the company assets and whether they have significant disposable value. Lynch says real estate, oil, precious metals will be lodged in the AFS according to their book values, and that could have been decades ago and all might have already appreciated. Not sure if this is the case here in the Philippines but it sounds like a good accounting practice to me. Further, if a company has lots of networks, coverage, and effective wide reach (cable TV, electric grids and water utilities), and are still fully functional, then that must be something that has been fully depreciated already in the company books but are still worth a great deal. Patents and copyrights, exclusive rights are also valuable assets that are not reflected accurately in the AFS.

So there’s the Top10 +1 list from Lynch, with my own two cents. One does not need to use all these, whatever works for you will be great.

My Rating: ★ ★ ★ ★ ★ ★ ★ ★ ★ ☆

***

Found this article helpful? Share to a friend, after all sharing is caring!

Follow us on Facebook, Instagram and Twitter. Check out Truly Rich Club and see if you want to enjoy the same benefits I get. Support our cause, donate via Paypal.

Not yet a member? Join our mailing list, absolutely for free. Just click here.

May you have a richer life!