SOUND BOARD: Yay! PSEi was up but why?

1. The Philippine Stock Exchange Index (PSEi) is a capitalization-weighted index composed of stocks representative of the Industrial, Properties, Services, Holding Firms, Financial and Mining and Oil Sectors of the Philippine Stock Exchange (PSE) [Bloomberg]. It  was up on 29 May 2020 because we had a net foreign buying of 955.39 Million Pesos; that means, foreign investors were buying shares of stocks in the PSE more than they were selling, which drove the PSEi up by 4.82% or 268.62 points from 5570.22 to 5,838.84 level. The proximate cause could be that there is some level of certainty now that businesses in the Philippines will open and operate come June 01, prompting foreign investors or traders to come in.

Net foreign buying of 955.39M catapulted PSEi above its 50-day Exponential Moving Average 

2. The role of foreign investors or traders in the PSEi is important as they add volume and liquidity in an otherwise thin market; simply put, they have the money that could instantly impact the performance of the PSEi. Absent foreign investors or traders participating in the stock market, PSEi would have no momentum to rally and breakout from its resistance level as what happened to PSEi in the past two and a half months.

The encircled green long column signifies large buying volume which can be primarily attributed to net foreign buying.

3. It is actually only the second time since March 16 that we had net foreign buying. The first time was on 05 May 2020. All other days, we had net foreign selling, which suggests that foreign investors are pulling out their money from the market and placing it somewhere else. If we "follow the money" as the saying goes, we will probably end up in the global market where there is volume and liquidity. That's why some popular traders or investors have also focused their attention to the global market. I just follow suit and am starting to learn more about trading and investing in the US stock market for diversification.  Of course, it is always recommended to invest or trade in our own stock market to help our economy recover or grow faster.

THINK PIECE: To buy or not to buy MerryMart at its IPO price of Php 1.00 per share?

(Disclaimer: This is not a stock or investment recommendation. I am just thinking aloud. )

  

Image courtesy of https://merrymart.com.ph/

I am thinking about it.

Since I am not fully convinced in buying MerryMart Consumer Corp. (MM) at its Initial Public Offering (IPO) price of Php 1.00 per share, the answer is NO...for now. But I will monitor MM's stock price on  June 15 (listing date) and perhaps do some intraday trading if the price is right.

As you may have already known, MM is a new player in the grocery and pharmacy retail industry, aiming to compete against the likes of Puregold, Robinsons, Mercury Drug, Metro Gaisano, and SM. MM's primary shareholder is Injap Investments, Inc. , which is the investment holding company of the Sia family --- the family behind Mang Inasal and Double Dragon Properties Corp.

MM seems to be attractive based on its prospectus. However, as of this writing, I am uncertain if it will be a good buy at Php 1.00 per share. I have considered the following factors:

1. Valuation.

MM is overvalued because it has a Price-to-Earnings Ratio (PER) of 271.2x in 2019 as compared to the average industry PER of 20.39x in 2019; this PER suggests that investors are willing to pay Php 271.2 for every peso of MM's earnings, when in fact, on the average, investors are only willing to pay Php 20.39 per peso-earnings in the retail industry. 

Puregold only has a PER of 19.88x in 2019, while  RRHI, the group that operates South Star Drug, has 32.13x. You can compare the PER of MM to the PERs of its competitors as shown below:

Image courtesy of https://www.abcapitalsecurities.com.ph

For an IPO, I prefer to buy stocks at a price close to the average industry PER regardless if it is above or below the average industry PER. In this case, MM's PER is 1,230% greater than the average industry PER. It is a huge difference, thus stockholders will definitely be paying a premium for a share of MM stock at Php 1.00.

When a stock is overvalued, its price tends to go lower. Hence, there is a huge possibility that MM's price would drop from Php 1.00/share. If it happens, stockholders who bought the stock at Php 1.00 would be at loss, unless they managed to immediately sell the stocks at a higher price or managed to cost-average.

2. Use of IPO proceeds. 

A company is attractive if a substantial amount of the IPO proceeds goes to expansion rather than debt repayments. As investor, I do not want to invest in a company which will use my money just to pay off its debts. I want the company to use the money to grow and reap profits.

In the case of MM, substantial amount of IPO proceeds will go to capital expenditure and working capital for store network expansion thereby making MM very attractive. In fact, MM's prospectus shows that no IPO proceeds will be used for debt repayment. 

Screenshot of MM's prospectus re: Use of Proceeds 

However, it bears noting that MM wants to achieve faster expansion through franchising according to its prospectus. This begs the question: what really are the IPO proceeds for if MM will capitalize on the financial capabilities of its own franchisees for its expansion?

3. Business Model and niche market. 

A company is attractive if it will address specific market needs which a very few establishments only satisfy. As investor, I do not want the company to dip into a saturated market.

 

In a saturated market, there is already a lot of companies offering the same products and services meeting the demands of the market. There is no untapped demand in a saturated market, hence there is no need for a new player to come in unless the new player introduces an innovation in the market.

In the case of MM, its "innovation" is its "three-in-one concept", which combines a mini-grocery, personal care shop, and pharmacy in one store. According to MM's prospectus, this innovation of 3-in-1 store "will eliminate the need for several management positions and streamline this requirement to one pharmacist who will also act as the branch manager of the said three-in-one household essentials store."

You may observe that Mercury Drug, South Star Drug and Watsons already have this 3-in-1 concept. In all of these stores, you could buy your groceries and personal care products, and at the same time buy your medicines. Mercury Drug and South Star Drug also have 24/7 stores like any other convenience store.

But it would be nice to have more convenience stores with pharmacies scattered all over the country, right?! That could be MM's market niche.

4. The fact that Edjar "Injap" Sia is the man behind MM.

Injap Sia was successful during the IPO of Double Dragon Properties Corp. when its price rose 50% at its PSE debut. Manny Villar was also successful during the IPO of Golden Haven Memorial Park when its price rose 49.90% at its PSE debut, but he did not get the same results during the IPO of AllHome Corp. This begs the question, will there be a repeat successful performance for Injap Sia? History taught us that there is no guarantee for a repeat successful performance. But anything is possible. 

5. Increased demand for groceries and pharmaceuticals during the COVID-19 pandemic.

During the Enhanced Community Quarantine, supermarkets, convenience stores and pharmacies were one of the few establishments which were allowed by the Philippine government to operate. They are considered essential. Thus, it is nothing but natural for MM to gain interests from investors because its operations are not as hardly hit by the pandemic as the other establishments; this is the reason why MM is already oversubscribed, according to PNB Capital.  This might also be the reason why MM is overvalued. Its business is essential and resilient in times of pandemic, and investors believe that it could produce higher earnings in the future.

Conclusion:

Will I buy after processing my thoughts? I am still thinking about it. 

If I finally decide not to buy MM at its IPO Price, I will observe MM's price action on June 15 and see if it is worth a trade. 

SOUND BOARD: What to expect because of the MSCI rebalancing

Image courtesy of https://fee.org/articles/the-law-of-supply-and-demand/

Expect the price of $PGOLD to go up and expect the price of $SECB to go down.

This is because fund managers who track the MSCI as its benchmark and mimic MSCI's basket of stocks will have to remove $SECB in their portfolio by selling $SECB, thereby driving the stock price of $SECB down. Supply up + demand down -> Prices down.

On the other hand, fund managers will update their portfolio by buying $PGOLD thereby driving the stock price of $PGOLD up. Demand up + supply down -> Prices up.

The Law of Supply and Demand in play! 

$PGOLD is expected to go up

When the news broke out that $SECB will be removed, its stock price immediately went down. 
You could see a gap.

[Note: This post may need prior knowledge on what happened in MSCI rebalancing. You may read it @ https://business.inquirer.net/297215/psei-loses-0-45-in-thin-trade]

THINK PIECE: Where to start to invest?

Image courtesy of https://www.bpiassetmanagement.com/pages/bpi-investment-funds/

The answer is: Start with your Bank!

1. Investing in and through your bank is the first step in exploring investment opportunities simply because that is where your money is.

Banks have what they call, "Unit Investment Trust Fund (UITF)". UITFs are like Mutual Funds (MF). They are both pooled investments being managed by a trust entity or investment management company. The managers of UITFs/MFs invest the fund in equities and other securities, and if the fund earns, you earn proportionately to the size of your subscription or portfolio.

You could buy or subscribe to UITFs/MFs straight from your bank accounts. It does not require investment experience. Hence, if you are just starting to invest or just starting to build your confidence in making riskier investment decisions, UITFs/MFs are good stepping stones.

Navigate your online bank accounts and look for UITF to subscribe

2. Barring recession and depending on the fund you choose, you can earn from UITFs at a rate of 4% to 20% per annum; these rates are better compared to .025% to 2% per annum that you can earn if you only let your money sleep on your savings accounts.

However, with higher rewards come higher risks. UITFs do not a guarantee a return. There will be times that UITFs have negative calendar year performance. Just don't panic and don't sell. They only reflect the natural movement of the stock market ---up and down. For down times, it is important to manage your risks by diversifying your portfolio. There goes the saying, "do not put all your eggs in one basket". It means, do not put 100% of your savings to UITFs.

3. In my experience, UITF was my first investment. From UITFs, I shifted to MFs and then to stocks. 

My first UITF investment was BPI Balanced Fund because that was the golden mean between the bonds fund and the equity fund. Based on my assessment at that time, I found the ROI in bonds fund too low for me, and the market volatility in equity fund too high for me. Thus, I just chose to invest in balanced fund because it got both bonds and equities in its investment allocation.

4. Hindsight 2020. I should have invested in equity fund for higher returns, now that I understand how the stock market works.

SOUND BOARD: Effects of ABS-CBN shutdown on other businesses

[This is raw]

70 Congressmen killed the franchise of ABS-CBN, the Philippines' largest network, because of their own personal vendetta against ABS-CBN. They put their personal interest first, ahead of  the interest of the Filipino people, their constituents. 

Instead of helping each and every Filipino and business to survive the crisis brought by COVID-19, the Congressmen chose to put an end to ABS-CBN's franchise at the expense of a lot of employees and other businesses. 

Effects:

- 11,000 people lost their jobs.

- Advertising companies lost their clients after losing half of the audience in TV market. See https://business.inquirer.net/296787/ad-companies-feel-impact-of-network-shutdown

- Investors lost confidence in the Philippines, seeing how the government can adversely affect the operations of businesses without regard to due process of law. See https://www.bworldonline.com/forced-closure-of-abs-cbn-may-hurt-investor-confidence/

- Domino Effect on other industries rendering services to ABS-CBN. See 

https://www.rappler.com/voices/thought-leaders/analysis-how-abs-cbn-exit-will-hurt-philippine-economy

- Research firm lost biggest client, ABS-CBN. See https://business.inquirer.net/306434/abs-cbn-shutdown-aftermath-research-firm-ad-agencies-also-cutting-jobs

- Less exposure of sports events. See https://cnnphilippines.com/sports/2020/7/17/ABS-CBN-Sports-retrenchment.html?fbclid=IwAR3Geb4kl6m-OyTIk8aFzmXM0V_Uj63X3xdezK-XtQLdc5XdzWfPUarGIWA

Given the adverse effects of the ABS-CBN shutdown to a lot of people, I can't help but think if the 70 Congressmen have conscience. 

This is indeed a very very sad episode in the history of the Philippines. 😞😢😟

THINK PIECE: How to save money

Image courtesy of https://www.slideshare.net/luizdeasis/building-wealth-through-philippine-stock-market-investing

Pay yourself first, then live within or below your means! That is the ultimate tip.

1. It just means that every time you receive your allowance or income, you immediately allocate a portion thereof to your savings.

There is no hard and fast rule on what percentage of your allowance/income should you allocate for savings. You can even start with just 1% or 2% of your allowance/income, but you have to save consistently and regularly until it becomes your habit. No buts, no ifs, no don'ts.

2. Whatever is left from your allowance/income, you allocate it to your expenses ---your budget for expenses. Then, you have to "live within your means". Meaning, you adjust your spending to make everything fit to your budget; this actually compels you to observe yourself and be mindful of the prices of goods you are spending on.

Once it becomes your habit to Pay Yourself First, that is the time that you can (gradually or drastically) increase the percentage of your savings allocation because you already have insights about your spending tendencies or habit, like you are now able to identify what expenses are dispensable. You may reallocate some of your funds from the expenses side to the savings side as you please.

With your hard-earned savings, you are now in a position to explore investment opportunities!

THINK PIECE: To buy or not to buy a Variable Life Insurance?

Simple answer: Buy only if you have dependents. If you do not have dependents, it is best that you invest your money in other income-generating securities for maximum capital appreciation or income growth.

1. Yes, buy a variable life insurance if there are other people relying or depending on your income (e.g. a family who depends on your financial support).

A life insurance guarantees that your beneficiaries (e.g. dependents) would get a certain amount of money in case of your demise. Thus, if you are concerned about the financial situation of your dependents after your death, then you need to buy a life insurance. 

It is best that you buy a life insurance as soon as you have a dependent (e.g. as soon as you build your family) because premium payment goes higher as you get older.

2. No, do not buy a life insurance if you do not have dependents (as in nobody relies on your financial support). If you prematurely buy it, you lose the chance of focusing your funds in other higher income yielding investments for maximum income growth or capital accumulation, because a portion of your premium payment in variable life insurance answers for the cost of insurance, which serves no purpose if you do not have a dependent.

At this point, what you can to do with your money is to invest it in mutual funds or other income-generating tools (e.g. stocks, bonds, unit investment linked fund) to earn more money.

Do not be worried about paying higher premium for variable life insurance should you decide to have a family later in your life, because you will be able to afford it because of the capital or income you have already accumulated in the past.

For a concurring expert opinion on the matter, you may watch the interview of Suze Orman with Karen Davila on ANC at 19.19 timestamp.