Is the Philippine Stock Market Expensive?
May 29, 2013
The Philippine stock market has rallied in 2013 breaking all previous highs and making new all-time highs every month. From 19x in the start of the year at 5,812, the market PER has now reached 21x PER in 7,229. This has raised alarm bells. Recently, UBS and Goldman Sachs tagged the Philippine stock market as Underweight saying that it’s expensive. The PSEi has also reached the 7,000 level. This was the PSEi forecast of JP Morgan for 2013 made in 4Q12, “a PSEi of 7,100 in a country with 7,100 islands”, they said. Has the PSEi reached its target? A lot of investors have already packed their bags selling Philippine stocks from last week when it reached a high of 7,404. Target reached, sell in May and go away, Philippine PER is at 21x third to Japan’s 26.03x South Korea’s 26.12x. (That’s right; South Korea was a bargain before, but now it has become expensive also.)
But is the Philippine stock market really expensive?
The market PER of 21x is an average of the 30 basket of stocks comprising the PSEi valued at ttm (Trailing 12 Months) earnings. This method is used by the PSE (23.07x) and Bloomberg (21.51x). Right now, that average is from 2Q12 to 1Q13. The PSE also has an All-Shares Index PER of 22.97x as of last Friday. In our coverage of 57 stocks, we use a market PER based on an average EPS of four years actual earnings and 2013F. Our recent market PER is 21.57x.
All of these PERs are averages. However, they’re not averages of stocks with near equal PERs but of a group of stocks with high PERs and the rest with low to almost high PERs. In our 57-stock coverage, 20 or 35% of our basket of stocks have PERs of >21x. Another 14 stocks have PERs of >16x and <21x. And most importantly, 23 stocks or 40% have PERs of <16x. Below is the data in picture form.
Note: If you’re seeing some stock codes unfamiliar to you, it’s because we also cover third-liner stocks that pass our investment criteria of having good value
23 stocks is a rich source of value in a country with a 6.8% GDP growth behind China’s 7.7% and a stock market with healthy corporate earnings growth. In the height of earnings season 1Q13, major listed companies reported earnings growth ranging from 21% to 33%. 1Q13 earnings growth compiled so far averages 14%. Growth is a scarcity global fund managers are after, and the Philippines (3.11x) is third behind Peru (2.69x) and China (1.68x) in terms of PEG using country PERs and GDP growth. This is from a group of 18 major developed and emerging markets we monitor periodically.
What makes the PSEi expensive are the ETF and other big fund darlings like ALI, ICT, JFC, URC, SMPH, AC, SM and BDO. Their PERs range from 29x to 63x, and they have market caps to accommodate the high volumes preferred by foreign and big local funds. The 21x PER average is an inequitable average. There really is big value hidden underneath the ETF and other big fund darlings. This value can be easily tapped by smaller investors as they are not bound by the high-volume or market cap stock pick requirement of big funds.
Fund manager Peter Lynch and Columbia University Professor Bruce Greenwald recommends investing in value stocks not yet covered by analysts. These stocks are not popular, can be small to midcap but have competitive advantage and value. They say that when stocks become discovered and covered by analysts, they become expensive and are kept expensive justified by the quarterly earnings announcements. We’ve seen the number of seats and tables grow in analysts meetings of VLL and SM over the years as well as their share prices. TA was a small oil and powerco with a solid balance sheet we covered and was bullish on in 2012. In their rights offer presentation last November 2012, even analysts of the big houses attended. From PHP1.16 in the start of the year, TA went as high as PHP3. In the last Philippine Third-liner Stocks Book we made for our MyRA subscribers, we have 12 stocks featured. This came from five from the first time we made that in 2010.
The Philippine stock market is deceivingly expensive. It’s like a bag of snack foods in the Philippines in the early 80s. After you munch salty or cheesy or spicy snack food goodness, after all the crunching, when you thought that it’s over, there’s a surprise toy inside at the bottom of the bag. We’ve mentioned of a PSEi of 8,000 in 2013 previously. When the PERs of the 23 stocks with PERs <16x move up, the target is reachable. At 8,000, we estimate a Philippine market PER of 25.58x. If it’s still an inequitable average, we will still invest and position in the remaining stocks with value as the Philippines’ GDP continues to grow at favorable levels.
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.