I received a question in my post entitled “Applying value investing in the Philippine stock market” and I wrote such a long response to the comment that I decided to turn it into a blog post. The question is as follows:
“Im still a student and ive been searching for philippine large-cap value stocks..
we have a project on constructing a financial portfolio just wanna ask if whats the best valuation method to determine if a stock is a value stock? and how are the phil stocks classified into large cap, or small cap? US has this $5 billion range ive been looking for that same sort of classification applicable to the phils . . .” – Enji
My response is as follows:
It seems that you have two questions here. The first one is concerning classification by Market Capitalization in the Philippine stock exchange and secondly is with regards to the best valuation method to determine “value stocks” in the Philippine stock exchange. I do not dub myself as an expert, but let me try to answer your question the best way I can.
1.) On classification of the Philippine stock exchange by Market capitalization.
Market Capitalization (Market Cap for short) is computed by multiplying share price (as sold in the market) by the number of shares in issue. It is a consensus opinion of what the market thinks what the company is worth.
To get the current market capitalization for stocks listed at the Philippine stock exchange, go to the Philippine stock exchange website. Go to “Market quotes” located on the left side bar and click on “Stock quotes”. Then on the right you can see “PSE COMPOSITE AND SECTORAL INDICES.” Click on “PSEi.” You will then be shown a table containing the latest Index composition with the free-float market capitalization.
With regards to Market Cap classification, (Large Cap, Small cap, Medium cap) this kind of classification is not very popular in the Philippines and is not being used. In fact we do not have a capitalization index. The only classification used by the Philippine stock exchange is the sector or industry classification. That is stocks are classified by which sector they belong. (Such as Financials, industrial products I mean companies, property etc…) If you notice we have a sector Index in the Philippine stock exchange but not a Market Cap Index.
However classification by Market Capitalization in the Philippine stock exchange does exist I’ve noticed some fund managers advertising that they invest in “Large Cap” stocks in the Philippine Stock Exchange.
As to what is their basis as to what constitutes “Large Cap” or “Small Cap” stocks, that I do not know. Each brokerage firm, stock exchange and even each individual analyst has their own way of determining this. For example in the U.S and all over the world the rule of the thumb is that “Large Cap” refers to companies whose market cap is over $5 billion. In the Philippines I do not know what is classified as “Large Cap” as this classification is not very popularly referred to in most materials about the Philippine stock exchange.
Also, as a small value investor, I really do not care about market capitalization as it has no bearing on my valuation if I should buy or sell a certain stock. I only care about the the intrinsic worth of a business. All the other data seems “garbage” and useless to most value investors. Besides Market Capitalization only tells you what the market thinks about the stock so for me it’s a useless piece of information.
2.) On the subject of the best valuation method to determine if a stock is a value stock
Being a value investor and exposed to value investing myself, I have to be biased in saying that “value investing tenets” is the best valuation method to determine if a stock is a “value” stock.
Take note that stock valuation varies depending on who is doing the evaluation. Even value investors have different ways of evaluating if a stock is a “value stock.” However all value investors do share almost the same “value” tenets and this can be traced to one source and that is Benjamin Graham, the dean of Wall Street and the “Father” of value investing.
I cannot discuss in great detail how I do my stock valuation to determine if a stock is a value stock because it takes too long to write about. However I can point you to the write direction. I advice you to grab a copy of the book entitled Rule Number #1 by Phil Town. Two other good books are “Buffettology” and “The New Buffetology” by Mary Buffett and David Clark. Most of the stock valuation method I follow is derived from these three books.
Once you get the idea in those books, you can start applying the ideas by digging for data from companies listed in the Philippine stock exchange.
One of my main problems in investing in the Philippine stock exchange is the lack of information available to make an informed decision. Unlike in the U.S, the data available to investors is overwhelming.
For example I have a thick guide book I purchased years ago from the Philippine stock exchange called “Corporate handbook” which is subtitled as the “Definitive guide to the Companies listed on the Philippine stock exchange” This guidebook summarizes financial and market information on each company listed on the Philippine stock exchange. Included here are the financial statements, stock prices, and P/E ratios among others from 1997 to 2002. I ordered this sometime in 2003. I find this material very useful.
I wanted to get a new updated one, so I went to the Philippine Stock exchange late last year to get the most updated copy (2003 to 2007). I was informed that it was no longer available. I asked for a substitute and they said that none was available. I was somewhat shocked. How do they expect investors to make an informed decision? The only option left was to wade through the financial statements and the Philippine stock exchange reports to dig the data myself. So I did this for some companies that I think are good value investments for the years 2003 to 2006.
Anyway, let me leave you with this Warren Buffett quote “Success in investing doesn’t correlate with I.Q. once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
In order to get your investing temperament right, read a lot of Warren Buffett and value investing books. I have read all that I can about Warren Buffett and value investing and I have never stopped learning. I suggest you start with something light like “How Buffett does it” by James Pardoe. Most of these books are available at Fully Booked or Power Books.
I hope I have satisfactorily answered your question. Let me know if I can be of further help.
Atty. Zigfred Diaz
The Guerilla investor hehehee 🙂