I received a question in my post entitled “Applying value investing in the Philippine stock market” and I wrote such a long response to the comment that I decided to turn it into a blog post. The question is as follows:
“Im still a student and ive been searching for philippine large-cap value stocks..
we have a project on constructing a financial portfolio just wanna ask if whats the best valuation method to determine if a stock is a value stock? and how are the phil stocks classified into large cap, or small cap? US has this $5 billion range ive been looking for that same sort of classification applicable to the phils . . .” – Enji
My response is as follows:
Dear Enji,
It seems that you have two questions here. The first one is concerning classification by Market Capitalization in the Philippine stock exchange and secondly is with regards to the best valuation method to determine “value stocks” in the Philippine stock exchange. I do not dub myself as an expert, but let me try to answer your question the best way I can.
1.) On classification of the Philippine stock exchange by Market capitalization.
Market Capitalization (Market Cap for short) is computed by multiplying share price (as sold in the market) by the number of shares in issue. It is a consensus opinion of what the market thinks what the company is worth.
To get the current market capitalization for stocks listed at the Philippine stock exchange, go to the Philippine stock exchange website. Go to “Market quotes” located on the left side bar and click on “Stock quotes”. Then on the right you can see “PSE COMPOSITE AND SECTORAL INDICES.” Click on “PSEi.” You will then be shown a table containing the latest Index composition with the free-float market capitalization.
With regards to Market Cap classification, (Large Cap, Small cap, Medium cap) this kind of classification is not very popular in the Philippines and is not being used. In fact we do not have a capitalization index. The only classification used by the Philippine stock exchange is the sector or industry classification. That is stocks are classified by which sector they belong. (Such as Financials, industrial products I mean companies, property etc…) If you notice we have a sector Index in the Philippine stock exchange but not a Market Cap Index.
However classification by Market Capitalization in the Philippine stock exchange does exist I’ve noticed some fund managers advertising that they invest in “Large Cap” stocks in the Philippine Stock Exchange.
As to what is their basis as to what constitutes “Large Cap” or “Small Cap” stocks, that I do not know. Each brokerage firm, stock exchange and even each individual analyst has their own way of determining this. For example in the U.S and all over the world the rule of the thumb is that “Large Cap” refers to companies whose market cap is over $5 billion. In the Philippines I do not know what is classified as “Large Cap” as this classification is not very popularly referred to in most materials about the Philippine stock exchange.
Also, as a small value investor, I really do not care about market capitalization as it has no bearing on my valuation if I should buy or sell a certain stock. I only care about the the intrinsic worth of a business. All the other data seems “garbage” and useless to most value investors. Besides Market Capitalization only tells you what the market thinks about the stock so for me it’s a useless piece of information.
2.) On the subject of the best valuation method to determine if a stock is a value stock
Being a value investor and exposed to value investing myself, I have to be biased in saying that “value investing tenets” is the best valuation method to determine if a stock is a “value” stock.
Take note that stock valuation varies depending on who is doing the evaluation. Even value investors have different ways of evaluating if a stock is a “value stock.” However all value investors do share almost the same “value” tenets and this can be traced to one source and that is Benjamin Graham, the dean of Wall Street and the “Father” of value investing.
I cannot discuss in great detail how I do my stock valuation to determine if a stock is a value stock because it takes too long to write about. However I can point you to the write direction. I advice you to grab a copy of the book entitled Rule Number #1 by Phil Town. Two other good books are “Buffettology” and “The New Buffetology” by Mary Buffett and David Clark. Most of the stock valuation method I follow is derived from these three books.
Once you get the idea in those books, you can start applying the ideas by digging for data from companies listed in the Philippine stock exchange.
One of my main problems in investing in the Philippine stock exchange is the lack of information available to make an informed decision. Unlike in the U.S, the data available to investors is overwhelming.
For example I have a thick guide book I purchased years ago from the Philippine stock exchange called “Corporate handbook” which is subtitled as the “Definitive guide to the Companies listed on the Philippine stock exchange” This guidebook summarizes financial and market information on each company listed on the Philippine stock exchange. Included here are the financial statements, stock prices, and P/E ratios among others from 1997 to 2002. I ordered this sometime in 2003. I find this material very useful.
I wanted to get a new updated one, so I went to the Philippine Stock exchange late last year to get the most updated copy (2003 to 2007). I was informed that it was no longer available. I asked for a substitute and they said that none was available. I was somewhat shocked. How do they expect investors to make an informed decision? The only option left was to wade through the financial statements and the Philippine stock exchange reports to dig the data myself. So I did this for some companies that I think are good value investments for the years 2003 to 2006.
Anyway, let me leave you with this Warren Buffett quote “Success in investing doesn’t correlate with I.Q. once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
In order to get your investing temperament right, read a lot of Warren Buffett and value investing books. I have read all that I can about Warren Buffett and value investing and I have never stopped learning. I suggest you start with something light like “How Buffett does it” by James Pardoe. Most of these books are available at Fully Booked or Power Books.
I hope I have satisfactorily answered your question. Let me know if I can be of further help.
Sincerely,
Atty. Zigfred Diaz
The Guerilla investor hehehee 🙂
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Good day!
Thanks very much for the reply post. I tried searching for ebooks on Rule #1 however it seems none are for free. 🙁 But anyway, I was able to get some excerpts like the 4Ms and the 5 Basic Valuation methods.
Btw, we’re students from UP and I am actually from Cebu. We are given 1,000,000 pesos as the capitalization for the portfolio. We decided for an asset allocation of 65% stocks, 25% bonds, and 10% cash, based on a moderately aggressive risk tolerance.
Time horizon: 5 – 7 years
Expected return: 20% (??? is it practical?)
Objective: Capital preservation and growth
Strategy: Lump-sum or one-time investing
Just wanna ask for your opinion of the above investment plan esp the allocation.
Now, we’re down to the diversification and security selection.
Which industry do you think is appropriate to invest in during these times? Actually, we have ‘randomnly’ picked some companies (given the many listed companies at PSE) without no basis at all.
Here is the list by sectors:
1. Property
Megaworld vs Ayala Land vs Highlands Prime
2. Food and Beverage
Jollibee vs Universal Robina
(3. Chemicals – still considering)
Chemrez Technologies, Inc.)?
4. Transportation
PAL
5. Telecommunications
PLDT
6. IT
PhilWeb
7. Medical: (haven’t chosen one but perhaps international stocks most probably in Singapore given that it’s a hotspot for medical tourism)
we’re still undecided as to the allocation percentages but we’re putting more weights on IT, Food and Beverage, Medical and Telecommunication.
We’re planning to use the 5 Valuation methods as mentioned in Rule No. 1. We’re advised to compute for the intrinsic value of the company as basis for evaluation though.
Is investing in Most Active and Top Gainers Stocks advisable based on the PSE?
We’re considering using data for the past 6 months for the comparison and analysis of the behavior of the prices of the stocks with other qualitative information that we hope we can gather.
whoah! mga beginners pa lang jud. hehehe Pahelp lng sa feasibility.
Thank you very much and we appreciate your willingness to help.
We’ll owe you one. 😉
Enji: I’ll inform you once I have created a post for your above questions 🙂 Is your course banking and finance ?
BS accountancy Sir
Thank you very much.
We’re quite having a problem in calculating for the sticker price.
We used the calculator at http://my.instacalc.com/calc/45305d39bb554e0190ed2b86f94bb0f0 however it seems that all stocks, except for PLDT, are priced way way above their sticker prices. 🙁 *sigh*
We were thinking that maybe something’s wrong with the P/E ratio..
It seems that we need to use the industry average for the P/E. pero wla available data for it in PSE unlike in S&P 500.
We’re still looking for other alternative stock valuation methods.
Currently,we’re screening the stocks based on the MOAT (Big 5 numbers) criteria according to Phil Town.
Thank you very much! God bless! 🙂
enji: Are you sure ? You might be wrong on your computation rather assumptions. A lot of stocks in the Philippine stock market right now are dirt cheap becuase of the financial crisis. You cannot believe it, some of them are even selling below book value ! Ayala Corporation (AC) whose latest book value based on the 2007 annual report is somewhere at 220+. Its selling in the market now for below the 200 level . ( I think last week its selling somewhere at 180+) Megaworld corporation (MEG) whose book value is somewhere at 2.40+ is even selling somewhere at the .50 level ! Talk about a bargain !
Some stocks have however been reselient and has never dropped below their book value. An example is SM prime holdings (SMPH) and Jollibee Foods corporation (JFC)
Anyway, perhaps you had computed the wrong sticker price because you followed strictly Phil Town’s standard. We need to adjust and apply it to the Philippine setting. I use Phil Town’s big 5 numbers and other helpful inputs, but I don’t follow the ROIC standard he set because it is too high for Philippine corporations. I follow ROE instead.
If you can do a research on “Buffetology” by Mary Buffett and David Clark that would also help a lot in adjusting some of Phil Town’s standards. Anyway to show you, I will email you a sample evaluation I did with Ayala Corporation. Let me know if you have further questions.
Good day Atty.
Thank you very much for the unconditional help that you’re putting up with our project.
I’m still studying the worksheet you’ve given me. The evaluation you did was very comprehensive.
Hah! Never thought that investing could be that *#*#s?!.
Well, yep, I did compute the wrong sticker price because I was using the wrong data. I realized that the computations you used in the worksheet for the intrinsic value is way better than that used in the sticker price calculator. It was straightforward relative to the latter.
My concern here is the availability of the data especially the EPS growth rate and PE ratios. We need to get at least 5 years of historical data. We already obtained the financial statements of most of the companies, usually limited to 2007 data. What we initially did is to compute for the growth rate for the 2-year period. And I believe using these growth rates would quite render the projections unreliable.
But anyhow, what would be the best estimator that we could use for the projections of the future EPS given the limitations?
And any suggestions on where we can dig more of financial information?
We tried the sites of the companies but findings, at most, are only till 2004
Thanks again and more power!
enji: Glad to be of help. Just email me if there is any data you need. I might be able to help. I’ll inform you once I have composed blog posts for your questions 🙂
good day sir, am an investor of philequity fund inc., philequity peso bond fund, and atrkimeng equity which are now doing well as far as navs are concerne. sir, am now thinking of selling all my shares from the said mutual funds since my investments are now negative16.38%,plus2.65% and negative23.40%, respectively from almost 24% to 29% dated March 17, 2009. please guide me to understand the market since the stocks are now soaring?
further, pls help me where should i find the philippine stock exchange index (PSEi)from 2005 to present to help me understand the stock market and/or mutual fund.
thank you very much and more power.
very truly yours,
albert s. awat
tarlac city
Albert: Hi ! Your question requires a lengthy answer so I will compose a response to your answer soon via a blog post. I will inform you once it is up.
Albert: What do you mean “pls help me where should i find the philippine stock exchange index (PSEi)from 2005 to present to help me understand the stock market and/or mutual fund.” Do you mean market data ? I will compose a post for your questions.
There are actually two things you need to know about stocks:
1) How to value the business.
2) How to think of prices.
If you do not have the time, i’d settle for buying a low-cost index fund or alternatively, buy PLDT which is itself consists more than 25% of the index.
For buying mutual funds, most of the time these guys have published positive results (i.e. higher net asset values) and that’s one of the reason why most people jump into the fund.
Most of the time, people gets into the market when prices are going up and so with performances. Most often than not, you will be too late in riding the show.
The best way to buy a well managed fund fund is when it’s NAV is lesser. Please also take into consideration that asset size matters. Funds with bigger investible funds will find it difficult to outbeat a market. however, you must think of a fund as a longer term tool to finance your retirement rather than profiting from short term market gyrations.
So stick to a longer timing horizon.
Xuzhu: Yep, as Warren Buffett said “By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.
However this is what he said about the “know something” investor:
“If you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantages, conventional portfolio diversification (broadly based active portfolios)
thank you very much….
I admire your blog site sir!
I was googling “how to invest in the PSE” then i saw your blog.
I want to save up and start investing and your blog added the fire inside me. I was reading robert kiyosaki’s rich dad series and was inspired to start investing.
Thank you for inspiring me
Emman: You are most welcome ! Glad to be of help to “netizens” 🙂
Nice read on the philippine stock market. I have a similar site that also tackles phlippine stocks. I will try to visit yours from time to time. Just mail me if you want to exchange links.
Hi Sir, I just emailed you a while ago and have been reading your posts for 2 hours now…I really wanted to do online trading (BPI) but it seems I really have a LOT of stuff to learn *sigh… Thank you so much for your post, it’s been very informational and I really appreciate your time and effort spent in order to cater to the questions of people who wanted to start participating on the stock market (like me)!
Question sir: I looked at the demo of BPI online trading. Before you can actually BUY/SELL stocks, you must enter the Volume and the Price (is this price per unit?). I’m not sure what price to enter, do I enter the previous close price when buying or selling?
My sincerest appreciation for this blog. Thank you so very much!
–ashley
Ashley: Hi ! Just composed a posts for your questions check it out https://www.zdiaz.com/2009/06/newbies-questions-to-investing-in-the-philippine-stock-market/ Drop me a comment should you have further questions 🙂
Hi ashley! Its nice to know someone trading with bpi trade as well. I bought several stocks of GLO recently thru bpitrade and my first buy was fun! Though i lost around 5pesos per stock,its the thrill that makes me buy more. After all,stock prices are cheap now. I was having issues as well regarding what price to enter,i called the bpi trade helpline and the broker told me that you can bid up to three blocks higher or lower of thr current market price. I hope we newbies in the stock Market can meet and talk sometime.
hi emman! i’m also thrilled that i can now participate in the stock market! i know it will be a fun learning experience, i want to educate myself more on how things work with buying and selling stocks. thanks for leaving a comment, i’m more inspired to pursue this because other newbies are showing their support. cheers!
Hi. I’m just wondering where to find financial statements and Philippine stock exchange reports? Could I find them in the PSE website or are there other websites where these data could be found? Thanks a lot!
Atty,
Have you found a substitute for the “Corporate handbook”?
I want to implement Rule # 1 in the PSE setting, and I was wondering where to get the 10 year numbers for the big 5 stats.
Could you point me in the right direction? 🙂 (Online or printed)
Thanks!
Erwin: Hi ! So far there is no substitute for the Corporate handbook. Before the year ends, I will be visiting the Philippine stock exchange to research on company data beyond 1997. I will be inquiring about this matter also. Will let you know once I have a “substitute” for this. If the substitute is not available then I guess we will have to come dig the data ourselves. 🙂 I’m planning to come up with a compilation of 10 years data if it is not available 🙂
Sir, I am currently doing my research about value investing. I just want to ask if i can send you the copy of the first three chapters of my research and request for some of your ideas?
tnx.
boy_kololoy: Sure ! Send it to my email.