Tuesday, 7 August 2012

The PSE: under-loved and under-priced

John Mangun
OUTSIDE THE BOX
Business Mirror
http://www.businessmirror.com.ph/home/opinion/30953-the-pse-under-loved-and-under-priced

THE Philippine Stock Exchange (PSE) is too often treated like someone’s “mentally challenged” cousin. No one wants to spend any time in conversation with him because he speaks a “different” language. But he is entertaining at parties since he can do 10 digit multiplications in his head.
By that I mean that the political class takes full and complete credit when the market is up but when the market is down it is Europe’s fault. Or China’s. Or the US’s. Or now with the space craft landing on Mars, it will be the Martians’ fault.

The PSE has the reputation of being a closed society, an Old Boy’s club. But the exchange does little in practice to change that perception. The latest is the front page, at least in the business section, of the “stock manipulation” investigation on recent Initial Public Offering issue, agricultural company, Calata Corp.

The stock opened on listing day at P7.40, went lower to P6.66 and then closed at P7.70. The following day the priced dropped 4.6 percent.

But over the next seven trading sessions, Calata shares hit a high of P24. The day after hitting P24, the price fell and closed at P12.88, down 46 percent.

Potential price manipulation says the PSE and the Securities Exchange Commission (SEC). Bear in mind that no one has ever been successfully prosecuted for stock-price manipulation by the SEC.

The only valid securities trading fraud is buying or selling on insider information not immediately made available to the public, of a material nature to the company. The SEC should ask American ex-convict Martha Stewart about that.

An offshoot is releasing false information that influences investors’ decision to buy or sell a stock. The Internet is famous for that.

The SEC is claiming that false trades were made to create the appearance of heavy volume. Good luck proving that when some P84 million was traded the first day. I could explain to the SEC exactly what happened but my expertise is not free and anyway, they have many in-house experts.

But the bigger problem is that the way the “Calata Affair” is being handled and portrayed, it creates the impression that the stock market is rigged. It is not. Take it from someone that watches every trade on the market.

All these so-called problems of potential price manipulation would be solved instantly if the exchange would enforce its public float rules to insure that so many shares were in public hands that the cost of even thinking about price manipulation would be prohibitive.

Discussing whether the PSE is too “expensive” is like talking religion where dogma and belief is more important than facts. I will try.

The selection of issues that make up the PSE Composite Index has often been like a barangay beauty contest. The contestant that sells the most admission tickets wins.

The conventional wisdom is that the Price-Earnings-Ratio (PER) of the PSE is higher than that of neighboring exchanges. That may be true on paper but it is like comparing the size of natural breasts with breast implants.

The problem is that the PSE index stocks do not represent the total Philippine stock market.

Yesterday the PSE index PER was 18.08. Thailand’s is 15.56 and Jakarta’s is 17.85. That gives the impression that the PSE is expensive.

The 30 issues that make up the PSE index are among the 35 largest companies by stock market value. That makes sense. But do they reflect the total stock market in terms of profit versus share price?

PSE component Belle Corp. sells at a PER of 213. First Gen Corp. trades at a PER of 51. International Container Terminals (ICT) has a PER of 26.

PLDT’s PER is 16.7. Globe Telecom trades at a PER of 15 and Megaworld’s is at 7.

There must be variations but when two very good and profitable companies like ICT and MEG have such a wide divergence, you cannot have an accurate picture of our exchange. Most good PSE issues are cheap.



E-mail to mangun@gmail.com, Web site is www.mangunonmarkets.com and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.

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