First Metro Asset Management Inc

I SECOND THAT EMOTION by Gus Cosio

7:00 pm  Sunday  115 August 2010   Philippine Stock Exchange Index 3469.52 (Friday close)

Weak economic data and a gloomy Federal Reserve statement sent the DJIA falling by 3.3% this week on fears that the flagging economic recovery could turn into a double-dip recession.  As usual, markets across the globe put on a similar bearish sentiment.  The low volume of trading also reflects the generally quiet summer and investors anxiety over the market’s direction.  In New York, about 3.4 billion shares traded on the NYSE Composite volume, well below the average 5.4 billion shares normally traded.

Meanwhile, Germany reported that its economy grew by 2.2% in the 2nd quarter compared to the 1st quarter well above market expectations of 1.4% growth.  Such a quarter-on-quarter growth has never been recorded before in reunified Germany which should be welcome news since Germany provides the engine for Europe a sa whole.

The rest of the capital market saw the volume of U.S. junk bonds exceed $155 billion, 80% higher than in the year-ago period.  Second and third tier companies are refinancing their debt at lower costs and investor demand has been quite robust.

These information taken together tells me that while there is reason to be cautious in the broad market, there are some spots where investors find value.  The Philippine market may just be one of them since in spite of a 15% rise in the PSEi YTD, constituent stocks remain relatively inexpensive.  While the global economic recovery is in question, recent history has shown that our economy has been relatively unscathed.

For particular stocks, GLO has declined further and while technical indicators show it as oversold, I think it would be dangerous to own this stock.  I would use any bounce on this issue to be an opportunity to sell.  GLO was emblazoned all over Bloomberg television Thursday morning as causing earnings decline for Singapore’s Singtel.  Globe’s showing was described by Bloomberg as “devastating” and such a statement leaves a scar in investors’ minds.

In contrast, the competitor that is gaining market share at GLO’s expense – DGTL – is seeing such a good earnings recovery.  Revenues for 1H2010 was Php 7,975.3 million, up 19.1% from 1H2009 of Php 6,693.5 million driven by the 30.6% growth in the wireless segment.  While operating expenses grew by 14.6% to Php 5,228.0 million from 1H2009 Php 4,562.4 million, EBITDA for the period was Php 2,747.2 million, up 28.9% from P2,131.1 million in 1H2009 due primarily to the higher service and non-service revenues generated by the wireless business.  Net income for the period was Php 145.4 million – a great recovery from the net loss of Php 638.0 million in 1H2009.  DGTL is a definite recovery story and even if telcos are not currently in fashion, these numbers tell a story of undervaluation in my mind which I will be willing to place a bet on.

MEG net income in 1H10 ended 10% higher YoY at Php 2.21 billion but some analysts were disappointed because consensus was for a 17% rise in earnings.  AGI, net income on the other hand, increased by 43% Y/Y in 1H2010 to Php3.69 billion paced by a 22% Y/Y jump in revenues to Php21.26 billion. AGI is generating earnings of Php595 million in 1H10 from strong growth of its Newport City .  AGI beat expectations due to better-than-expected results of its liquor and quick service restaurant unit which showed 47% % and 12% topline growth.  The Newport City enterprise could generate attributable profits of Php2 billion.  AGI is MEG’s parent and it looks to be a better play for me.

Remember when trading this week that emotion is a trader’s enemy.  One should not be trigger happy nor too gun shy in time as these.  The sentiment globally is negative, but local companies are doing well.  Investors everywhere are also looking for bright spots to put cash into whether in their domestic markets or overseas.  Keep in mind that cash is still abundant and investors will have to put it all to work eventually.  Seize the opportunity when it comes.

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First Metro Asset Management Inc