The Law of Averages
(June 6, 2010)
Following last week’s advisory, one can form an investment portfolio by mixing bargain stocks with premium stocks. Since the investor is paying for a premium and minimizing the discount for his stock purchases, it is highly recommended that the premium stocks must have compounded growth capabilities and stable financial conditions.
By averaging the blended multipliers of bargain and premium stocks within the valuations of 16.9x PER and 1.5x PBV, the investor safely expands his choice of stocks. To note, 16.9x PER and 1.5x PBV are the valuation limits for this week. Multiplying them gives us a blended multiplier valuation of 25.4x.
In the table of stocks below, purchasing our cheapest stock, VLL, and power firm EDC, a premium stock with a blended multiplier of 45.9x, still makes a sound investment as its average blended multiplier is 24.0x. This is still below the limit of 25.4x for this week. The table shows other stock combinations with blended multipliers safely below 25.4x.
Of the premium stocks the bargain stocks can average with in the table, we recommend AEV, GSMI, URC, SM and SMCB as the ones worth the picking. To note, holding company AEV is a cheaper alternative to power firm AP, the fourth most expensive stock in our coverage with a blended multiplier of 123.9x. Similarly, holding company SM is also a more rational alternative to mall operator SMPH at 72.8x and property developer SMDC at 100.0x.
Below is the table of stocks from the cheapest to the premium stock that can be purchased using this averaging method. The bar represents the border between bargain and premium stocks. Stocks beyond EDC are very expensive.
Pymwymi Fund Performance
The Pymwymi Fund is up 22.5% and the PSEi is up 11.7% from the start of 2010.
Note: Philippine Stock Market Trading Advisory Disclaimer Below