Some stock selection pointers

One retail investor was complaining how come the number of shares she held had shrunk. Worse, the stock’s market price has gone down, too.

She has not sold a single share since she acquired them, yet the number of her holdings is now five times less. And because the market price of the stock has gone down, she is also losing badly in her investments.

Apparently, our retail investor doesn’t have the necessary academic financial background to understand why, at times, the number of shares of a company may expand or shrink. The process is known as “stock split” (or forward split) or “reverse stock split,” as the case may be.

A stock split is the result of a decision made by the company’s board of directors to increase the current outstanding number of shares of the company by issuing more shares.

In a stock split called 2-for-1, for instance, every shareholder will be issued an additional share. If the company has an outstanding number of shares of 15 million before the split, this will increase to 30 million after the 2-for-1 split.

What happened to our retail investor’s shares was the result of a reverse stock split. The company reduced the total number of outstanding shares. This is done by dividing the current shares of the company by the number of the outstanding shares to be reduced.

In the case of our retail investor, the reverse stock split was at 1-for-5. The outstanding shares were divided by five, reducing the company’s number of shares to five times less.

Whether it is a forward or reverse stock split, the process does not actually add any real value to the company. To illustrate, if a company has 500 million outstanding shares, and the shares are trading at P0.20 per share, a 1-for-10 reverse split would reduce the number of shares to 50 million. With the business situation of the company remaining basically unchanged, the shares should also trade at about P2.00 apiece.

A reverse stock split could also create selling pressure. Like in the case of our retail investor, the market price of her stock pick dropped substantially as a result of the selling pressure created by the reverse split.

Bottom line spin

If you have been watching the market closely, after the initial 10-day rally at the beginning of trading this year, it has been essentially moving sideways and trading on a narrow price band of about 150 to 250 points.

Total value turnover has likewise remained low at a year-to-date daily average of P6.3 billion. This is presently compounded by the behavior of foreign investors.

The decline in foreign investors’ participation is understandable, taking into mind the intention of the US Federal Reserve to increase interest rates again this month.

Fortunately, the country’s monetary and economic fundamentals are said to be strong enough. And at the rate our peso is moving against the US dollar, we may have a good chance of revitalizing our exports and some industries.

Most of them may directly benefit some listed companies. As reported last Friday, five Chinese companies have submitted letters of intent to the Board of Investments (BOI) to invest a total of $10.3 billion. Together with Russia’s intent to also expand trade relations with the country, of “keen interest” are investments in “waste management, aircraft engines manufacturing, grains supply, fuel and gas supply, pharmaceuticals, construction materials and metal supply, oil downstream, renewable energy, iron and steel and shipbuilding and ship repair.”

The Chinese companies are the following: Aviation Industry Corp. of China (AVIC) International Aero-Development Corp., Liaoning Bora Enterprise Group Co. Ltd., Huili Investment Fund Management Co. Ltd., Dalian Wanyang Heavy Industries Co. Ltd., and YiDingTai (YDT) International.

Of special interest to me (being involved in a listed steel company) is that of Huili to set up a world-class integrated steel mill and help advance the Philippines’ bid to be a major producer of high-quality and safe steel products by 2030.

Huili intends to implement a two-phased project to realize an output of 3 million metric tons of rolled steel. The project is valued at $3 billion, with the potential to employ 6,000 workers by 2022.