Corpecon Research

Our Contribution to Value Investing

February 24, 2012

Pymwymi Fund Doubles

Back in 2009, we made the Pymwymi Fund, a basket of 15 stocks deemed to have high growth and resiliency.  Five of them equally share a 50% weighting.  Ten of them equally share a 50% weighting.  We made this to show ourselves if the investment methodology we chose as the foundation of our research works.  In 1Q10, the PSEi beat the Pymwymi Fund, but after that, it has left the PSEi in the dust.  It even beat First Metro Save and Learn Equity Fund and Philam Strategic Growth Fund in 2010.  They were the best stock funds in that year.  The Pymwymi Fund dilly-dallied in 2011 and rallied again in early 2012.  From its inception in January 5, 2010, in just  two years and almost two months’ time, the Pymwymi Fund has doubled in value in February 15, 2012.  It now has a yield of 117%.  This minus the cash dividends it has generated since inception.  This fund is just based on research and a simple Long Term Buy and Hold strategy.

In Memoriam:  Walter J. Schloss, Value-Investor (1916-2012)

He didn’t go to college but learned about value-investing from Ben Graham himself.  After serving in WWII, he worked in Graham-Newman and even became an officemate of Warren Buffett there.  He went out on his own and generated an average annual return of 16% from 1955 to 2002 beating the S&P 500’s 10%.  He chose debt-free, undervalued stocks trading below net working capital and book value.  He also suggested minimal contact with listed companies’ management as they tend to provide “picture-pretty” data.  Independent analysis is the key.  Mr. Schloss is second-gen value-investor after the pioneer, Ben Graham.  This investment methodology lives on with us and the many others around the world.

“What’s It Worth?” on an Index Level

After all the research and margins of safety in place, value investors ask the most important question, “What’s it worth?”  They also buy their chosen undervalued stocks regularly making them position at low levels to maximize long term gains.  Our contributions to this investment methodology are the PSEi Bands and the PSEi Tracker.  Here, we position our buying in the low levels computed for the PSEi to maximize our gain.  We not only ask the question, “What’s it worth?” on a company level but on an index level as well.  Like other value-investors, we don’t chase prices and let the market serve us.  Patience and fortitude are essential.

We made these two fund-management tools because we observed that value-investors regularly buy undervalued stocks even when the market is high.  They have that luxury if they invest in US equities.  There’s lots of choices, lots of stocks.  There’s the S&P500, the Russell 2000 and the Wilshire 5000.  But in the PSEi where there are just around 200 stocks, you have to save your bullets and strike like a sniper.  Shoot only when the shot is there to maximize value.  200 stocks and only 23 are really worth buying.  23.  And out of that 23, nine are two to four baggers.  Just nine.

We’ve formed the Pymwymi Fund 2 based on our fund-management tools.  Regular stocks buying is also part of the strategy here and not just a one-time Long Term Buy and Hold done in the first Pymwymi Fund.  We’ve already asked the question, “What’s it worth?” on a company and index level.  So far, as of this time, our portfolio is composed of zero stocks.  It’s because…

“I am a stone.  I do not move.  Very slowly, I put snow in my mouth, then he won’t see my breath.  I take my time.  I let him come closer.  I have only one bullet.  I aim at his eye.  Very gently, my finger presses on the trigger.  I do not tremble.  I have no fear.  I’m a big boy now.”

Enemy at the Gates

Mandalay Pictures

2001

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Disclaimer

The Philippine Stock Market Research report is solely for information. It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned. The information herein has been obtained from sources believed to be reliable. Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report. All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice. No liability can be expected for any loss arising from the use of this report or its contents. As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.

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Q:  How You Doin?  A:  Like an Empty Barrel Rising from a Frozen Lake

February 20, 2012

It’s been roughly three years since Corpecon Research became Corpecon Research.  From five years of data-mining, Corpecon Data Services decided to go into Value-Investing of Philippine equities in February 2009.  It’s been good.  In 2009, we built our database.  In January 2010, we released our first product, the 100-page Philippine Stocks Guide.  In May, 2010, Angping and Associates Securities, Inc. subscribed to our research service, MyRA, and in November 2011, Nieves Securities, Inc. and PNB Securities, Inc. became MyRA subscribers as well.  In this span of time, we can say that value-investing works in the Philippine Stock Market.  The Pymwymi Fund is featured regularly to show that value-investing works in the Philippine Stock Market, but what about the other stocks we have recommended?  Below is a status of stocks we recommended back in January 2011.  As it came out, 2011 was a volatile year ending with a dud 2.4% return if you bought at the start of the year and sold at the end of the year.

The FGEN and FPH Combo

We said before that these two are the new AP/AEV combo.  FGEN was PHP12.16 per share and FPH was PHP67 per share back then.  Now they are PHP13.60 and PHP60.50, respectively.  The share prices of the two would have been higher if not for affiliate EDC affecting them negatively.  EDC’s Bacman power plant is late from starting, and it incurred a PHP5 bn impairment expense in writing off its North Negros power plant.  Though FGEN has the only gain from the combo, we still like the two stocks.  FPH just realized an extraordinary gain of PHP8.85 bn from the sale of MER shares, and it now owns 73% of Rockwell Land Corp.  It finally has an identity of a property and power company.  FGEN, on the other hand, has the prospect of fully owning its two main power plants by buying the 40% stake of BG Asia Plc.  This is a big deal if consummated as it will elevate FGEN and FPH’s earnings to a new level.

RFM, the New URC

That’s what we said before, but unfortunately, the foodcos suffered from high raw material costs.  From their stellar performance in 2010, their share prices plummeted in 2011.  RFM was PHP1.69 at the start of 2011, and its share price went as low as PHP1.05 in September 26, 2011.  Now, it’s back to PHP1.54 as wheat, milk and sugar prices have eased back to comfortable levels for the foodcos.  We still like RFM.  It is still undervalued, and a good foodco choice as the others are expensive (JFC, URC, AMC, SMB, GSMI, PF), very expensive.  SMC is also undervalued, but it’s more of a food and power holding company now.  We’re frowning a little on RFM decision to borrow money for plant expansion.  But, it is acceptable as it will meet the demand for its food and beverage products in a short time.

ETON Mirrors SMDC’s Performance

ETON was PHP3.80 when we recommended it.  It is now PHP3.10.  What hounds this stock is the minimum 10% free float that it does not have yet.  There is a risk of it being delisted next year if it does not comply with the PSE.  ETON, however, has signified that it will do a secondary offering of shares to meet the 10% level.  ETON has the highest discount of 81% to its Estimated Liquidation Value (ELV) among all the Philippine listed companies.  This is the value when you immediately close shop the company and sell all its assets.  This is a crazy-sale and unbelievable discount.  We see ETON’s share price rallying if it remedies its free float problem pronto.

Previous Diamonds in the Rough

We said that even though COAT and GMA7 are textbook value-stocks, their share prices are slackers.  From PHP2.38, COAT is now PHP2.61.  GMA7 was at PHP7, and now it is PHP9.65.  This just proves this whole write-up’s point.  Value-stocks aren’t popular, but when their time comes, they rise BIG.  COAT has not risen that much yet, and GMA7 is bolstered by speculation that TV5 will merge with it.  These are sound stocks with market leadership and no debt.  They were also undervalued.  GMA7 is not now, but COAT still is.  There is also a couple of slacker but fundamentally-sound stocks we like back in 2009-2010.  They are even main members of the Pymwymi Fund.  They are AC and UBP.  UBP made a steady rise in 2009.  It was PHP59.50 in January 3, 2011 and was flat in 2011.  It is now PHP102.90.  AC has been steadily rising since 2009 and suffered the 2011 volatility.  It made a major rally from December 2011 and is now at the PHP400 level from just the PHP200 level in September 2011.

Value-stocks were likened to empty barrels stuck beneath a frozen river by the pioneer of value-investing.  As the ice melts, the barrels surface.  No matter how thick the ice is, it melts freeing the empty barrels deep beneath the frozen river.  We have seen these barrels surface before in 2010 with AP, AEV, URC, AMC, SM and SMDC.  GMA7, AC and UBP were stuck deep beneath the frozen river, and they have surfaced.  There are empty barrels still surfacing such as CHIB and EEI.  There are many barrels still stuck beneath the frozen river of the PSE, and their time will soon come.  This is about investing and not trading.  This is about making real gains and not chump change from trading that keep traders up at night.  Analyzing that those barrels are empty of risk and leverage is the key, and it is just natural for them to surface from beneath the cold ice of criticism, neglect and doubt.

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Disclaimer

The Philippine Stock Market Research report is solely for information. It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned. The information herein has been obtained from sources believed to be reliable. Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report. All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice. No liability can be expected for any loss arising from the use of this report or its contents. As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.

Filed under: Philippine Stock Market Research | Tagged: blended multiplier, corpecon, equities, Philippine Stock Exchange, Philippine Stock Market, philippine stocks, PSE, securities, stock market, stocks, value investing | Leave a Comment »

Leveraged

November 5, 2011

Just like our Jose Rizal, Benjamin Franklin was a renaissance man.  He was a main figure in the American Revolution.  He flew a kite and discovered there was electricity in the atmosphere.  He made one of the first effective anti-counterfeiting measures by using a leaf imprint on paper currency which is almost impossible to copy accurately.  He was also into finance giving us the most memorable quotes, “Time is money” and “A penny saved is a penny earned”.  That’s right.  His least memorable finance quote though is “He that goes a borrowing goes a sorrowing.”  Maybe it’s because it sounds like a forced rhyme.  Below is a forced rhyme explaining Ben’s quote.

-oOo-

The higher the debt, the higher the interest expense

The higher the interest expense, the lower the net income

The lower the net income, the lower the retained earnings in stockholders’ equity and the higher the company’s PER

The lower the stockholders’ equity, the lower the company’s capacity to pay cash dividends and the lower the book value

The lower the book value, the higher the company’s PBV

The higher the company’s PER and PBV, the lower the company’s value

The lower the company’s value, the lower is its upside and the higher is its risk

So avoid debt

-oOo-

Even before Benjamin Graham, Benjamin Franklin was already practicing value-investing.  To value investors, debt is something that has to be avoided.  To finance working cap, capex and expansion, it is better to use internally-generated funds than debt.  It is no wonder debt rhymes with death because debt kills value.  For a company or even a government to borrow money, there has to be a very, very good reason.  However, a lot of companies and governments normally and easily use debt as a funding source.  In these times, this has gone out of control as seen in the US and European debt crisis.  How is China’s debt to GDP by the way or debt as a percentage of GDP?  It seems like it’s the remaining superpower left somewhat standing.  It’s 17.70%, in the lower tier globally (whoo, sigh of relief).  What about us?  It’s 47.30%.  We’re somewhat in the middle (o… k).  US is 93.20%, France is 81.70%, Germany is 83.20%, Italy is 119%, Greece is 142.80% and Japan is 220.30% (still in your seat?).

In our full coverage of 47 stocks, almost half of them have a debt to equity ratio (DE) of below 1x.  Having a DE of higher than 1x means liabilities is higher than capital.  To be conservative, we analyze companies’ leverage based on DE and not its variants like net debt to equity.  Even suppliers credit or accounts payables is a form of borrowing or money owed to another party.  The least-leveraged companies in our coverage are PX, BEL, GMA7, FLI, AMC, URC, VLL, MEG, SMDC, FPH, AGI, LCB, HP, ALI, AC, JFC, RLC and SMPH.  There are also third-liner stocks with low leverage such as CHI, COAT, I, PHN, RFM, TA, EEI, ANI and FAF.  See, it can be done.  Debt can be minimized and even avoided by the biggest and even the smallest of companies.

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Announcements

We would like to warmly welcome

-oOo-

Nieves Sanchez, Inc.

and

PNB Securities, Inc.

-oOo-

as subscribers to our MyRA research service.  They are now equipped with value-investing tools in the Philippine Stock Market as well as Corpecon Research’s signature fund management tools such as the Global Tracker, PSEi Bands and Margin of Safety Tracker.  Corpecon Research provides weekly Philippine Stock Market research to its MyRA subscribers.  We can still accommodate a couple more subscribers to MyRA.  Seek Value and Minimize Risk with Us.  Thank you.

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Disclaimer

The Philippine Stock Market Research report is solely for information. It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned. The information herein has been obtained from sources believed to be reliable. Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report. All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice. No liability can be expected for any loss arising from the use of this report or its contents. As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.

Filed under: Philippine Stock Market Research | Tagged: blended multiplier, corpecon, equities, Philippine Stock Exchange, Philippine Stock Market, philippine stocks, PSE, securities, stock market, stocks, value investing | Leave a Comment »