Question: I have always been conservative in my stock investments. I only trade blue-chip stocks but sometimes I feel like I have been missing a lot, especially when I see my friends making a killing from speculating third-liners. Should I gamble on tips and rumors? Please advise.—Celeste Christopher by e-mail
Answer: If you are the kind of investor who does not have time to monitor the stock market, investing in speculative stocks is not for you. Speculative stocks can be very risky because they don’t have the fundamentals to support a higher stock price expectation. Professional traders speculate on these stocks based on insider tips or recent company disclosures, believing that the stock will appreciate in value soon because of some significant changes that will happen to the company. What makes trading speculative stocks risky is that the stock can go up very fast as much as it can fall in just a few days.
Investing in speculative stocks without doing your homework is no different from gambling your money in the casino. Sometimes you can make money just by following tips from your broker, but most of the time you will lose. This is because you either bought a stock at a wrong price and did not cut your losses, or you kept it for too long without any idea where the company is heading to. There is nothing wrong with trading speculative stocks for as long as you play it carefully. You need to manage your risks by making an educated bet before you decide to buy.
Start by getting to know the company. Find out what the company’s business is all about and who are behind the management team. Review the company’s financials for the last three years to see how their earnings look like and if they have the financial capability to expand as they promised. Review its latest corporate disclosures to the stock exchange. You can get all these data by visiting the website of the Philippine Stock Exchange. Once you have all the information, identify the emerging story, that is, the speculations and rumors that will bring the stock up. Assess the situation carefully to see how possible the story is going to happen.
One of the most actively traded stocks last week was that of Manila Jockey Club (MJC). This stock went up to close at P3.82 last Friday, up by 77 percent on heavy volume from a low of P2.15 three days before. It makes one wonder why the market would be so excited to buy this stock even when its P/E ratio is already more than 100x. This is because the market is considering the possibility that the company will venture into a big gaming project, which justifies the current share price. If the project pushes through, the market expects the company to generate higher earnings and lower its P/E eventually.
A quick look at the recent disclosures by MJC will reveal that it has done some corporate restructuring recently. It transferred some of its properties to affiliates, apparently in preparation for a new business that will be into gaming and tourism. From the financials of the company, it appears that it will enter into a joint venture deal with another investor who will infuse the necessary capital to make this possible. The question is how much will the new project cost and at what price will the new investor come in. How soon will the project start and when will the cash flows start to kick in? If you can find answers to these questions, perhaps you can manage your risks and buy some of it for excitement.
Another stock, Tanduay Holdings (TDY), went up by as much as 200 percent last week to P14.66 from only P4.50 a few days before. The market was scrambling for the stock like crazy after news came out that the company would consolidate all the businesses of Mr. Lucio Tan and that it would be renamed LT group. Recent corporate disclosure will show that the majority ownership of Mr. Tan’s major businesses such as Asia Brewery, Fortune Tobacco and Eton Properties will be transferred to TDY, aside from the equity interests in Philippine Airlines, Air Philippines, PNB and Allied Bank. The consolidation will mean an instant increase in the annual sales for TDY and in its earnings.
Should you buy TDY at current share price? There are no details yet as to how much the impact on net income will be once all the businesses are in, but you can make an educated guess as to the value of the share price. If you compare TDY’s current market capitalization of only P45 billion with those of other listed holding companies, say, JG Summit’s (JGS) P227 billion, or SM Investment’s (SM) P461 billion, or San Miguel’s (SMC) P266 billion or Ayala Corp.’s (AC) P255 billion, it is easy to conclude that TDY’s current share price should eventually increase by at least five times. But be aware that the current available shares in the market for TDY are only 14 percent making it relatively illiquid compared to others. You can speculate that they will increase the public float to more than 20 percent in due time and this will likely make the stock a blue chip in the future.
When you invest in speculative stocks, always put a target selling price after you buy. This is to make sure that you don’t get carried away at the height of market excitement when the stock is rising strongly. You can sell slowly as the stock climbs. Manage your risks by monitoring it well. Follow up the corporate disclosures and financial press and find out what the market is saying about the stock. Remember speculative stocks tend to rise and fall very fast so you should always be on guard.
(Henry Ong is a registered financial planner of RFP Philippines. To learn about stock and bond investments, attend the Chartered Wealth Manager (CWM) program on September 1-October 6. For more details, e-mail info@rfp.ph or visit www.aafmphilippines.org.)