ILLUSTRATION BY RACHEL REVILLA
Investment strategies, ranging from momentum to contrarian and opportunistic approaches, often encounter formidable obstacles, leading to financial setbacks. Momentum strategies capitalize on favorable trends. Contrarian approaches challenge prevailing sentiments, while opportunistic tactics exploit advantageous circumstances.
The performance analysis of 163 stocks over the past five years presents a compelling narrative of losses, ranging from modest annual declines to significant setbacks. For instance, Puregold Price Club, Inc. experienced a notable annual decline of 10.1 percent. Noteworthy too is the aggregate pricing of shares at the Philippine Stock Exchange, witnessing an annual downturn of 5.85 percent.
A myriad of factors contributes to these declines, including instances when market prices overshoot intrinsic values, businesses suffer diminishing returns, operational surpluses erode and the supply of shares outstrips demand.
Despite the challenges posed, investors, disheartened by the prospect of recouping their losses, often find themselves hesitant to seek assistance.
Nonetheless, amid these trials, investors are compelled to confront the imperative of formulating strategies to reclaim lost ground.
In the pursuit of recovery, a proactive approach is indispensable. This writer advocates for a judicious evaluation of proven strategies and a prudent approach to investment management.
Strategy No.1: Identifying undervalued stocks
At the heart of successful investment endeavors lies the concept of intrinsic value. Investments rooted in fundamental soundness and robust underlying worth are poised to deliver favorable returns over the long haul.
Assessing the true value of stocks entails a straightforward yet pivotal task—scrutinizing the current share price without delving into intricate financial minutiae. Should the price indicate that the company stands to earn more than practical, the stock might be perceived as overpriced. Conversely, if the market price suggests less, it could signal that the stock is undervalued.
Consider the case of Ginebra San Miguel, Inc. (GSMI), a notable exemplar of undervaluation.
GSMI has exhibited a commendable annual investment return of 49.4 percent over the past half decade, inclusive of reinvested cash dividends.
Throughout the preceding decade, GSMI has consistently (unfailingly) demonstrated robust revenue growth, often surpassing 19 percent in notable instances. Concurrently, operating income has surged by a remarkable 18-fold over the same period. With its status as a well-established brand, particularly renowned for its iconic gin products, GSMI enjoys widespread brand recognition and customer loyalty, translating into consistent sales and revenue.
While implied forecasts, predicated on offer prices, may allude to potential revenue declines in forthcoming years, the historical resilience of GSMI presents a compelling counternarrative, suggesting promising avenues for mitigating losses incurred from other stocks.
Strategy No.2: Profits outperform costs
The enduring value of any business rests upon its growth trajectory and its consistent delivery of robust profits.
At the forefront of this endeavor lies return on invested capital (ROIC), a pivotal metric encapsulating the returns stakeholders garner from capital deployment, factoring in associated risks and the time horizon for recouping invested funds.
Enter Asian Terminal, Inc. (ATI), exemplifying a commendable track record of profitability that surpasses costs, underscored by an impressive ROIC of 19 percent—a performance eclipsing the mean of 174 companies with positive ROICs by a remarkable 2.7 times.
Such elevated ROIC metrics not only affirm ATI’s enduring value but also underscore its proficiency in generating cash flows, positioning it among the industry’s elite performers, and outpacing stalwarts like Universal Robina Corp., Wilcon Depot and Century Pacific Food. Benefiting from government support and initiatives aimed at enhancing infrastructure and bolstering trade, ATI thrives in an environment conducive to port operations and logistics, thereby attracting keen investor interest.
ATI’s investment performance, amalgamating stock price appreciation with dividend distributions, has averaged 6.4 percent annually over the past five years, 11.2 percent annually over the past three years, and an impressive 38.6 percent in the past year.
In a landscape where substantial profits serve as a litmus test for a company’s true value, the imperative to identify enterprises that consistently outperform costs and thereby create substantial value becomes paramount, offering potential avenues for recovering losses incurred from other stocks.
Strategy No.3: Surplus cash for growth
Positive cash flow stands as the lifeblood of corporations, furnishing them with the means to sustain operations, fuel expansion and reward stakeholders. Conversely, cash scarcity can erode a stock’s performance, necessitating a rigorous examination of the company’s operational efficacy and financial framework.
The presence of surplus cash, stemming from a company’s operations after fulfilling reinvestment imperatives and debt commitments, serves as a pivotal indicator of financial robustness.
A compelling exemplification of this principle manifests in International Container Terminal Services, Inc. (ICTSI), emblematic of resolute financial acumen. Presently boasting earnings before interest and taxes (EBIT) margin surpassing prepandemic levels by a notable 10 percentage points, with operating income reaching unprecedented heights—doubling its pre-pandemic figures—ICTSI claims the largest free cash position on the Philippine Stock Exchange, excluding banking entities.
ICTSI operates an extensive network of container terminals strategically located across the globe, spanning emerging markets and pivotal trade corridors. This expansive global footprint not only affords diversification but also exposes investors to varied markets, potentially mitigating risk.
Over the past five years, the stock has delivered an annual investment return of 27.1 percent, amalgamating price appreciation with cash dividends. This stellar performance underscores ICTSI’s proficiency in engendering shareholder value through sustained expansion and judicious financial stewardship.
In the face of persistent financial setbacks, investors are compelled to judiciously consider divesting their holdings, reallocating capital toward companies equipped with surplus cash earmarked for growth.
Strategy No.4: Demand for stock exceeds sharesIn the realm of stock investing, grasping the delicate equilibrium between the demand for and the supply of shares stands as a fundamental tenet. This equilibrium fundamentally shapes stock prices, exerting a direct sway on investment outcomes.
When demand for a particular stock surpasses its available supply, prices ascend as buyers vie for limited shares. Conversely, an oversupply relative to demand can trigger price declines as sellers seek to offload surplus shares.
Over the past half-decade, a discernible trend appears to have emerged wherein the supply of shares in various companies, including Alliance Select Food International, Apollo Global Capital Inc., Atok Big Wedge Co Inc., Basic Energy Corp., Cebu Air Inc., Concepcion Industrial Corp., Ferronoux Holdings Inc., Harbor Star Shipping Service, Integrated Micro-electronics, I-Remit Inc., JG Summit Holdings Inc., Lodestar Investment Holdings, Megaworld Corp., MRC Allied Inc., NOW Corp., Oriental Peninsula Resources, Philippine Racing Club, Puregold Price Club, Inc., Robinson’s Retails Holdings, Inc., Security Bank Corp., The Keepers Holdings, Inc., Universal Robina Corp., among others, outpaced demand. This disjunction in the supply-demand equation has significantly influenced the pricing dynamics of these stocks, leading to investor losses.
Conversely, certain entities stand out due to heightened demand for shares relative to their available supply.
Notable among these are Asia United Bank, ATI, Bank of the Philippine Islands, BDO Unibank Inc., Citicore Energy REIT Corp., DMC Holdings, GSMI, ICTSI, Metropolitan Bank & Trust Co., Premium Leisure Corp., (where Belle Corp. conducted a tender offer), SSI Group, and others.
Investors, encompassing both buyers and sellers, heavily rely on price trends as indispensable barometers for navigating opportune moments to enter or exit their positions in the stock market. (Indeed, the equilibrium between the demand for and the supply of shares is inherently dynamic, subject to fluctuations over time. Consequently, it is imperative to continually update the roster of companies experiencing shifts in this equilibrium.)
In the face of losses, a prudent strategy entails a rigorous evaluation of the long-term prospects of the company in question. Should the oversupply situation appear transitory, maintaining the investment may present a viable course of action. Conversely, if it signals waning investor confidence, divesting from the stock and diversifying the portfolio with entities experiencing a demand for stocks that exceeds available shares may prove astute.
Final word
In the dynamic world of investment, setbacks aren’t just obstacles but opportunities for growth. The strategies outlined here offer a road map for unlocking investment recovery.
From identifying undervalued assets to businesses with surplus cash, each strategy provides an avenue for recovering losses. Understanding supply-demand dynamics not only reduces risk but also offers opportunities amid market fluctuations.
Beyond strategies, there’s a call to confront challenges with prudence. While downturns test investors, they also present opportunities for the knowledgeable and well-prepared.
(Eduardo Banaag is an autonomous portfolio manager, proficient in assisting both institutional and retail investors. He had worked for big local and regional financial institutions as a professional fund manager for 25 years before retirement. As an equity portfolio manager for one of the largest institutional investors in the Philippines, he managed over P60 billion worth of funds and consistently ranked No. 1 in equity funds, particularly in the categories of one-, three- and five-year returns. Feedback at juniebanaag@gmail.com.)