Outside the Box: The PSE: May 2006 to May 2007

Electric rice cookers have taken all the challenge and most of the fun out of making rice. Before these modern appliances, you had to think about the amount of flame under the pot. You had to consider the length of time of cooking. You had to check if the rice should be stirred halfway through the process. Sort of like investing in the stock market before 2006. For the last 12 months, making money on the Philippine Stock Exchange (PSE) has been as easy as cooking rice. All you had to do was follow the easy directions and keep it simple. Look at the performance of three stocks on the PSE. In May 2006, PLDT traded near P2000. You could have invested your life savings in these shares at P2,100. In May 2007, you could have sold at P2,500 for around a 20-percent profit. Megaworld traded at P1.50 last year. A purchase of these shares would have more than doubled your money. From P15, Meralco traded one year later at P90. Simple, simple investing. PLDT is THE blue chip stock. Megaworld is the high-flier in the booming property sector. Meralco shines with increasing economic activity and overall growth. These three stocks were not the only big companies that provided big profits. Ayala Land rose from near P10 to P18. Shoemart started at P8 and traded this May at P12. Another Lopez company, Benpres, finished in the last 12 months at P4. You could have bought it at P1. So why didn’t everyone make a fortune through investing on the PSE this past year? For the same reason that not every family owns an electric rice cooker. “What happens if there is a brownout? How can we eat rice?” “I need to see the rice cook. How can I trust a machine to make sure the rice is cooked?” “Maybe it won’t work!” It is exactly the same way with stock-market investing. Last year, you could find 100 reasons not to invest in the stock market: high gasoline prices, politics, the war in Iraq, the 2007 elections, economic slowdown in the US, high unemployment, the “brain drain,” and manufacturing and imports down. Maybe we should throw in also the nursing exam scandal and the oil spill. Even with all of these “problems,” by September 2006, it should have been obvious that the market had survived all these factors and was looking to a brighter stock price future. If you look at a chart of prices, you can see that from the beginning of the third quarter of 2006, share prices in general never looked back. It did not take an “expert” to figure it out. Just by reading BusinessMirror every day would have demonstrated that company after company are allocating increasing amounts of money to expansion, from the property sector through outsourcing. And beginning with the second-quarter income results, companies told of increasing revenues and profits. And most potential investors sat on their wallets, avoiding the stock market, predicting that things were going to get worse. Here we are with the PSE index at an all-time high and many are convinced that the “rice cooker” really cannot do the job properly. Sure, prices have doubled, or even tripled, in the last year, but what about now? The market is taking a breather to form a support at 3,400. What was a strong price resistance must now be shaped into strong support. It is unlikely that we will see extraordinary price increases in the next two months. Having said that, the market could surprise and move toward 3,600.  This most likely scenario of prices remaining somewhat flat over the next six weeks will bring out comments that the market has topped out. This view will come from the same people that thought the market would never take off. Don’t believe it. By the end of the year, the PSE index will trade about 15 percent higher. But that will not be the story of 2007 as far as the market is concerned. What will happen between now and then is that issues that did not give investors profits for the past year will be the golden investments of the next 12 months. The reality is that the beginning of a blue chip bull rally is the easy time. If you did not increase your wealth during this first phase, you are going to have to work harder for the second phase. Finding the second line stocks that will yield large gains over the next nine months will take some effort. However, they will be there and I guarantee we will be talking next year of how well they performed this year.  E-mail comments to mangun@email.com.

http://www.businessmirror.com.ph/05292007/opinion02.html