Ayala Corporation Value Trap

The most risky investment out there is an institution with a lot of following. Ayala Corporation has been there since the beginning of the time in the Philippines. It is one of the oldest corporation in the country. But I think, of the recent events, shareholders of the company had been well played by the Ayalas.

Here's my thoughts on it. The Ayalas began a sell off of their shares cashing out P630 million total. This is after a share buy back of their own company share. A share buyback is a good way to increase share value, ramping up its price before a major sell off. The Ayalas did give a good value to the shareholders, from 300+ per share to 450+ per share after the share buyback. Then this is where it gets good, they sold all of those overvalued shares. Making P630 million in the process. With hype still on, the share price still moved upward some more.

If you're thinking, if the Ayalas sold all or most of their shares, then they don't own the company anymore? Wrong, they added tons more shares as a stock option. Diluting the share and undervaluing it.


Security Name : Ayala Corporation
Date : 02/07/2012
Headline : LA #0054: Ayala Corp. additional listing
Content : The Exchange approved on April 25, 2001, the application submitted by AYALA CORPORATION (the “Company”) to list additional 127,479,000 common shares, with a par value of P1.00 per share, divided into (a) 60,000,000 shares to cover the ESOP; (b) 60,000,000 shares to cover the ESOWN, (c) 7,309,000 shares to cover the 40% stock dividend for 1995 ESOP and ESOWN shares; and (d) 170,000 shares to cover the 50% stock dividend for 1996 ESOP shares. Further, with reference to Circular for Brokers No. 2515-2005 dated May 25, 2005, the change in the par value of the Company from P1.00 to P50.00 took effect and was reflected on the Exchange computer system on May 30, 2005. Correspondingly, this brings the number of common shares approved for listing from the aforementioned 127,479,000 shares, with a par value of P1.00 per share, to 2,549,580 shares, with a par value of P50.00 per share, divided into (a) 1,200,000 shares to cover the ESOP; (b) 1,200,000 shares to cover the ESOWN; (c) 146,180 shares to cover the 40% stock dividend for 1995 ESOP and ESOWN shares; and (d) 3,400 shares to cover the 50% stock dividend for 1996 ESOP shares. Finally, the Exchange approved on December 13, 2006, the application submitted by the Company to list additional 8,864,000 common shares, with a par value of P50.00 per share, to cover the Company’s ESOWN. In this connection, please be advised that an additional 484,918 common shares have been availed of and fully paid by the optionee/s under the Company’s ESOP/ESOWN. In view thereof, the listing of the additional 484,918 common shares is set for Wednesday, February 8, 2012. This brings the number of common shares listed under the Company’s ESOP/ESOWN to a total of 3,065,255 common shares.

Its like printing money. Lesson of the day: Not all share buybacks are equal.

Missed Opportunity on UBP (Union Bank of the Philippines)

I must admit that I have missed this one. The surge of UBP stock price is probably one that I would remember the most. It hits all of our stock picking criteria. A financial stock that has been ignored, a bank that I use for the past year because of its "moat" of the only bank which can activate your Paypal account using its debit card EON. With the rising industry of work at home jobs, these are wide moats that separates UBP from the rest.

The the bad thing is, I missed it. Rather, I forgot about the things that I use everyday. It never came into my mind. And most people ignored it too. Until its earnings was released and it was off the charts. Its parent company was buying back its shares before the earnings release which is also a good indication. And ramping up millions of shares for months. I missed it again.

Its share price was the lowest among its competition P40+ compared to its competition BPI and BDO and other banks which trades at P60. Its damn undervalued and we missed it.

Management is great, its a great company. Union Bank is a company owned by the Aboitiz's. And they are aggressively buying back the shares of their own company prior to the earnings release. That should have been a great hint to go in and accumulate its shares.

Overall, this stock hits all of our criteria and we missed it. I'm not worried though. I know there will be stocks like these. As long as traders trade stocks. As long as people follow the herd, there will always be one that would earn the most money. The mistake I made was that I never looked harder enough to miss this great opportunity.

A Review of First Philippine Holdings FPH

My FIRST ever review for First Philippine Holdings. There are only a few criteria for us to find the right company and one of them having been unpopular is one. But FPH is not unpopular. They are a Lopez company and is included in the Philippine index. They own the largest power producing and power distribution company in the Philippines, Meralco. But was later sold to MVP's company Beacon and Metro Pacific Investments.

FPH has been out of favor because of the sellout of Meralco. But the company have a return on invested capital of 56.38%. That means they have great management and great business. Being the Lopezes. The only bad thing that made traders shy away from this company is its sellout of Meralco. "Predicting" that they may reduce the earnings because of that. But great management and people behind the business will always produce great returns. The price of the stock is selling at P60.05 and is now underpriced by 56.28%. This is a great discount in my opinion.

Disclaimer: I am long FPH.

The Story of the 3 Value Investors

Value investing is one of the most popular  investing strategy that made Warren Buffett, the 2nd richest man in the world. He owes it to his teacher, Ben Graham. I'm making this post to differentiate the evolution of the value investing and how it can help you in your portfolio.

The first value investor is good 'ol Ben Graham. He is the father of value investing and wrote 2 popular books "The Intelligent Investor" and "Securities Analysis". They have been the bible of value investors eversince. The idea of Ben Graham is to buy companies that are selling for a really cheap price relative to their intrinsic values. Ben Graham often called it "cigar butts" because you are hunting bargain stocks that have a little bit of value inside them, but if were sold, you can make a decent profit. Later in his life, Ben Graham released a simple formula for picking stocks. Saying that he wants to make investing more simple that ever rather than scrutinizing each annual reports of each companies, he based his criteria more on the P/E. The lesser the P/E the better. But this formula did not made it to the limelight because its as if he was ignoring the first 2 previous books about valuing a company. He made it so simple that the first 2 books became almost obsolete. The formula was then added to the later revised edition of his books. In which our third value investor took, implement, tested, optimized, gave it a new twist and called it his own.

Warren Buffett, upon reading Ben Graham's books decided to become his student and worked for Mr. Ben Graham. He became one of his successful students as proof of what he is today. But his style changed when he realized that it takes too much effort to find bargain prices and sell them to make a profit and he becomes infamous to the people working in the company that he sold. Warren Buffett's style during his early years is to hunt cheap stocks like Ben Graham and sell the companies for profit. The employees in these companies were sacked as the selling completes. So he became unpopular with the locals. Warren Buffett realized this and added a criteria in selecting his stocks. "Cheap price is good. But a good business at a cheap price is better." So he went on and search for companies that are good and stable businesses with competitive advantage. This is how he made his billions.

Comes the third value investor whose book I just read, Joel Greenblatt. I'm still not sure if he should be ranked amongst the great Ben Graham and Warren Buffett, but his value investing is simple that combined the 2 principles of Graham and Buffett plus adding his own style of using quantitative analysis to compare all the stocks into a simple formula. He says to look for stocks that are selling cheap and stocks that have good businesses behind them. He is looking for businesses that has high return on invested capital this is a criteria from Buffett, competitive advantage, but Greenblatt wants to have a mathematical description of it not qualitative as Buffett analyze it. Greenblatt wants it to be in numbers.  And then he also looks for businesses that are selling cheap buy looking at its EBIT or Earnings Before Interest and Taxes over its Enterprise Value, Graham's style. The idea behind his formula is you want to know the real value of the businesses should you really buy the business in real life. Giving you a clearer picture of the value of the business. What's good about Greenblatt is he made it into a systematic approach without any decision making involved, you can even plot its formula in an excel file and watch the computer spit out the stocks that meet his criteria. Performance wise, it holds true. Graham, Buffett and Greenblatt all beat the market or performs better than the indices over a long period of time.

If its so great why isn't everyone using it? The reason behind that is simple. Eventhough Ben Graham made his principle public years and years ago, thinking that all people will be using his approach and thus making the strategy obsolete, it is still applicable today. Its because the style of these guys do not work for short term periods. It would take 2 - 3 years before you beat the market and most people can't stomach that kind of strategy so they go on and day trade. But over the long period of time, it is the easiest and most effective way to invest your money.

Never Play By Their Game

I would understand that some people would trade foreign currency. There is just no other way to make money in the currency market because of its volatility and the uncertainty of countries that could easily effect it. But in stocks, I see no reason to trade it. It doesn't make any sense. If there's only 1 position that you can take to make money in the stock market, and that is to buy a stock, why the hell would you even bother to sell it? To lock in profits? Then what? Enter the trade again for more commissions?

Many newbies in the stock market here in the Philippines get devoured by the traders that has been long in the game. They attend seminars and they have been taught how to trade just one way, so everybody sees the same chart as they. They interpret the same chart as they. This is very dangerous. If you become predictable, you won't make money. Trading is dangerous game, especially to the one who thinks that there is only one way to trade, you'll be taken advantage and your money gone. Be smart. Invest for the long term.

There's only one way to convince or persuade someone. And that is to give him the impression of easy and fast money.

Stock Trading vs Stock Investing

There will come a time where you will think about greed. Greed is good, but only for the smart. If you want to make big money in the stock market you have to be smart. Knowing the difference between stock trading and stock investing is a must.

Stock Trading is the process of going in and out of a security for the purpose of making profit. The time horizon of a stock trader is from minutes to a few days. They do not care about the company's underlying fundamentals, they only care about its volatility and movement. Most stock traders make use of charting or technical analysis to guide their trades. They are the hares in the "turtle and the hare" children story.

Stock investing is the process of buying a share of a company for the purpose of holding it indefinitely until their reason for buying becomes invalid. Stock investors look for the long term when they buy the stock. They don't care about the volatility of the market, they only care about the company's underlying management, finances and prospects of expansion. They are in it for the long term or even for a lifetime. Unlike trading, stock investors view the stock as a part ownership of the business. They are the turtles.

There are pros and cons in being a stock trader or investor. For example, a stock trader will make money faster than a stock investor. Because they go in and out of the trade, they make profits easily and fast. While investors will only profit once they sell, and they seem to hold on to a stock at very long time, they will only realize the profits later.

In terms of expenses, stock traders incur lots of expenses. Because each trade will mean commissions and taxes, the profits seem to diminish as long as they continue to trade. While investors gets tax breaks for holding it for a long time, they also minimize the expenses because they get to receive dividends from the company.

You Don't Have to Diversify

After reading Peter Lynch's book for the nth time, I came to realize that I am doing in wrong and not playing to my strengths. Picking stocks like a fund manager where you pick 10 stocks and more so that you are diversified does not make sense to me. Managers do that all the time so their losses are minimized, also gains.

An individual investor such as ourselves could benefit from the freedom of managing our own funds and can allocate the assets on the more concentrated ones that you are sure to likely profit within the next 10 years.

This and Warren Buffet's words that "You don't have to diversify". Is the deal breaker for me. He says, "If you own 50 stocks, do you rank the first stock as well as the 50th stocks? Do you know it as well? I don't think so..."

Mr. Buffet has a point. If you own that much of a stock, is there a way you would know that one stock is underperforming? Would you know each stock as well?

Find stocks that fits your selection criteria then concentrate on those stocks. You only need a few winners to make you a millionaire. Missing a couple of 10 baggers doesn't make you bankrupt nor lose money.

With all said and done. I reduced my stock holdings from 12 to 7. Trying to get rid of the last 1 to focus on this 6 stocks that I would like to concentrate on. 3 of which are dividend paying stocks and 3 of them are growth stocks that I expect to skyrocket for the next 10 years because of their great balance sheets and businesses. Freedom Fund has made great overhaul.