PSEi on the Verge of 4,000. What to Do in New Territory
September 13, 2010
The PSEi has boldly gone where it has not gone before, 3,902.56. As mentioned in our last report, the short term outlook is north for the PSEi. Liquidity is high and the average monthly corporate bond yields is decreasing. On a daily observation though, the yields of PSALM bonds maturing on April 22, 2015 and April 22, 2017 have had a slight increase late last week. All the other corporate bonds have decreasing yields.
The PSEi continues to be expensive. There are eight bargain stocks and ten reasonably-priced premium stocks in our Stocks Table as of September 9, 2010 from ten bargain stocks and ten reasonably-priced premium stocks as of September 6, 2010. The last time we had eight bargain stocks was April 6, 2010 when the PSEi was 3,253. That was the time 3,300 was a major resistance for the PSEi and when the fears of the China property bubble was high. There are also 16 out of 40 stocks with positive Margins of Safety as of September 9, 2010 for a ratio of 40% from 18 as of September 6, 2010 for a ratio of 45%.
The PSEi may be getting expensive, but there is no cause for alarm as of this time. Last week our two Margins of Safety were presented, but we failed to mention the importance of using the five-year average PER and the latest PBV (as of 1H10) in our Stocks Table. The very reason is that the basis of our valuation are money already earned and actual proven financial performance. The stock market is always be ahead of itself valuing stocks at projected earnings or expected net income. It is now looking at year-end 2010 and even 2011 projections. But what if the listed companies fail to deliver on these?
These projections are helpful in showing where earnings and book value are headed. They are based on best estimates but not 100% accurate. There are also numerous factors that can affect projected earnings, and since we are minimizing risk to our investment portfolio, the bedrock of our market valuation and stock picks is based on actual earnings and book value. Now if our Stocks Table is based on 2010 projected earnings and book value, we will have 19 bargain stocks instead of eight. However, this Stocks Table will be based on a single projected year instead of proven five years earnings and the latest book value.
4,000 is coming. What is the best thing to do? The advice playing like an old record, “be selective”, is appropriate in the current situation. Our advice though since our inception is buy the stocks within the Margin of Safety bars. As of this time, one can create a diversified investment portfolio out of them just like in our previous report, Bargain Stocks’ Target Prices. There is currently no cause for alarm, but we remain vigilant from last week for signs of the PSEi becoming a less-attractive investment.
Pymwymi Fund Performance
The Pymwymi Fund is up 46.8% while the PSEi is up 29.9% from the start of the year to September 9, 2010. The Pymwymi Fund’s performance notably bests two ICAP Stock Funds with the highest year-to-date yields. They are the First Metro Save and Learn Equity Fund (up 44.92% from the start of the year) and the ATR KimEng Equity Opportunity Fund (up 41.06% from the start of the year).
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