Is the stock market still a good buy at this level?

Q: I recently sold all my stocks that I bought last year at a good price and made nice profits from it. I was expecting the index to correct heavily soon so I can buy back shares and position for another run-up but the market kept going up. People are now talking of a 10,000-point target for the index despite the high valuations of stocks. I wonder if I should buy again now at higher stock prices or should I just keep my cash for the meantime. Can you advise me? – Crissy Glua by e-mail

A: You may really find it difficult to enter the market again especially if you have just sold your shares only to buy them back later at higher stock prices. It is hard to accept sometimes when the market does not behave the way you want it to. Perhaps, you would have not sold your shares if you knew that the market will not correct so much. But this does not mean that you should stop investing and just wait for the market to crash one of these days before you come in again. If you are serious in making money from the stock market, you must have a plan on how to play with it.

With 7,000 index target already reached, is there more room for the market to go up? With so much money circulating in the system coupled by falling interest rates and rising optimism for another investment upgrade soon, there is a strong momentum to sustain the current uptrend in the market.

Yes, the Philippine market is already expensive. In fact, the market P/E average at the moment is already at 26x, making it the highest in Asia. But being pricey does not necessarily mean risky. As a strategy, always relate risk to potential reward. There are stocks that may look too risky now because they are trading at historical highs, but if they look promising and investors are willing to pay a premium for their track record, their stock prices may further go up.

Have you ever wondered why some stocks, like Ayala Land (ALI), continue to enjoy strong buying support despite its high P/E valuation of 48x? If this were a regular stock, this would have been a screaming sell and investors will be selling this stock until its P/E aligns with market average. In a market that is awash in cash, ALI is perceived as a strong stock that institutional investors feel comfortable to invest their money in it. Investors pay premium to ALI no longer for the income that the company will earn now but for the ability of its management to deliver future earnings.

Other blue chip stocks enjoying premium valuations are Ayala Corp (38x P/E), Jollibee (36x P/E) and SM Prime (32x P/E). Could the other index stocks be following soon? Some of these that are worth looking at are Meralco (26x P/E), Manila Water (24x P/E), BDO (19x P/E), MBT (18x P/E) and PLDT (19x P/E).

The high valuation of the Philippine stock market only indicates the high expectations of investors that the economy will be stronger and higher earnings will eventually flow into higher stock prices in the future. The Philippines is perceived as a promising economy, less risky and more stable that will offer the most growth in the region after winning two investment grade ratings from international credit agencies.

While it is true that Philippine stocks are relatively more expensive now compared to stocks in other markets in Asia such as Thailand, Hong Kong and Singapore, the Philippines is the only market that is enjoying strong growth momentum amidst the slowing economies in Asia.

Is the 10,000 index target achievable? If corporate earnings growth this year exceed market expectations, strong bullish sentiment will likely sustain the momentum and push the market higher. Let us say that we target to have the same valuation of 26x P/E at 10,000 index level, this would mean that earnings of index stocks on the average must grow by 38 percent this year. Is this possible? Based on 2012 annual reports, stocks that contributed 80 percent weighting to the index actually reported an average earnings growth  of 38 percent. In fact, the top 10 index stocks that have combined weighting of 35 percent in the index had earnings growth rate of 54 percent last year.

With this bullish economic backdrop, you can take advantage of the current momentum by buying stocks that have relative potential upside. Choose stocks that have reliable earnings history, proven track record of management and big market following. Is the share price going up on heavy buying? Are there institutional buying into the stock? As you are buying into a market that is moving rapidly at the top, this is not ideal time to buy for long-term. This is a time to ride the market and take advantage of the big move probability.

When you trade, manage your risk by investing only with money you can afford to lose. Create your own portfolio. Follow the trend. Monitor the market. There is no guarantee that market will go up forever. Plan your trade.  Once you are invested, set your selling price target immediately. Sometimes you get too excited or too scared when stock prices become very volatile. Control your emotions at all times. Plan ahead at what price you intend to cut your losses if the market suddenly reverses its trend.

Henry Ong is registered financial planner of RFP Philippines. To learn more about financial planning and how to become RFP, attend our FREE personal finance talk on May 16, 7pm at PSE center, Ortigas. Pls email [email protected] to reserve or visit www.rfp.ph