FUNdamental Side: PEG RATIO

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source: http://www.valuewalk.com/

I bet by now you are in the level where we can say you are already a serious stock trader or investor. I know you you have been going from side to side, that is employing TECHnical and FUNdamental analysis to guide you in your stock bids or ask.

Another fundamental ratio which we can use to make sound judgement is the PEG Ratio.

PEG Ratio is defined by Investopedia.com as:

A ratio used to determine a stock's value while taking into account earnings growth.

As the definition says it is a valuation ratio taking into consideration the expected earnings growth. It is an estimate of the company's value(as reflected by the PE ratio) over  an expected growth rate.

To learn more you can watch  Investopedia.com's video presentation about this ratio below:

source: http://www.investopedia.com/video/

PEG Ratio just like PE Ratio can be use to check which  stock is undervalued and thus making a good buying decisions.

Now how can you use PEG Ratio in your trading or investing? Here is the catch with this ratio: one has to  understand risk in order to use this valuation ratio properly.

What risk again?

Yes, since PEG Ratio is a measure of the future earnings which is still uncertain you have to take into consideration  the risk associated with the stock. Also comparing one stock from the other might lead you to wrong decisions. Every company may have different nature of risk like a service company will have  different risk as compared with a holding company. Thus PEG Ratio is best use when comparing companies with the same nature and level of risk.

I have checked PEG Ratio of ALI & SMPH for 2011 in COLFinancial website and here is what I got:

STOCK	2011 Price	PE 2011	PEG 2011
ALI	15.16	27.93	0.90
SMPH	10.64	16.33	1.07

Lets use the above data to analyze these two stocks using PEG ratio.(Remember this is a 2011 data for example purpose only)

Price Comparison

Just looking at the price I guess you would have bought SMPH if you wanted to add a property stock in your portfolio. The lower price would mean you would be able to buy more stock with your limited funds. 

PE Ratio comparison

If you would base your buy decision you would probably buy SMPH right away because as compared to ALI it is way more cheaper to buy SMPH with a good return. Again PE is based on the current earnings but in reality you are just in the position to buy, you have to also consider the probability of you earning after buying the stock unless you intend to go short which will surely give you a good return since the stock is cheaper.

PEG Ratio comparison

 Looking at the PEG ratio it would tell you that comparing the future earnings ALI would be the better stock to buy. Again remember the risk that comes with this ratio. It is more of an estimate which may change upon unexpected events who knows SMPH would embark in new and better projects that would solidify its capability to generate better earnings next year thus changing the PEG ratio.

So there you go. PEG ratio will be best use if you are deciding between two stocks of the same industry and for sure for a time frame longer than months.

Are You Still Lost at the Stock Investing/Trading Craze in the Philippines? Check this Infographic

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Was searching the web for good content and it led me to this infographic by mint.com

It explains the basics of investing and even a history where did all this crazy stories I am writing about. Check it out and start learning, eventually you will surely jump in and be an investor in the Philippines by buying and selling shares in the Philippine Stock Exchange.

So far which is your top online stock broker in the Philippines

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I have slowed down a bit in writing new blog post. I have been reading forums, Facebook Group discussions, and other social media that talks about stocks specially those traded in the Philippine Stock Exchange. 

source: http://www.bloomberg.com

One surprise today is the hype with TDY(Tanduay Holdings Inc.) due to the 50% increase in market price brought about by the news that the Lucio Tan companies will be under one holding company which is TDY.

source: http://askthemoneycoach.com

It is so nice to see and read how young Pinoys from all background are now interested in the stock market. And one of the frequent question thrown at me is about which online stock broker is the best in terms of service or execution, research, and accessibility.  I tried searching a list that would rate the current online stock trading companies in the Philippines but none came. One search result is about global online stock brokers which rates Etrade and TD Ameritrade as the best. These two online stock brokers covers not only the US stock market but also other areas of the world including Hong Kong and Singapore stocks.

As for me I use two and these are COL Financial(formerly Citiseconline.com) and First Metro Securities Brokerage Corporation. I have been sharing these two including the latest upgrades done to their stock trading sites.

So far I consider these two the best site for stock trading or investing depending to which side you belong. The merits of these two top online stock trading companies has been mentioned or discuss in other blog post.  This time I want to hear from you guys.

This is your challenge.

To those who recently joined the stock trading bandwagon I would like to see your opinions by leaving comment which stock broker you use and why do you consider their site as the best stock trading site.

Your participation is a must, share your thoughts and answers to my challenge and lets expand the knowledge.

  

 

Stock trading vs. Stock investing

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 source: http://www.oasisllc.net

This issue has been lingering for sometime. Let me cast my thoughts on it and hoping it would clear some gray areas regarding the two. But first let's define them to established basis.

Stock trading/Momentum investing(from http://www.investorwords.com)

Buying and selling securities or commodities on a short-term basis, hoping to make quick profits.

Stock investing/Value investing(from http://www.investopedia.com)

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

The main difference of the two primarily lies on the strategy in achieving profitability. Trading is the act of buying and selling for quick profit while investing is more of positioning or buying at low prices and waiting for the stock to appreciate to profit.

In stock trading one watches particularly the stock's price changes against participants reaction to current trend. Price trends may be influence by current news within the company or in the Global or regional market in general. 

News like the entry of MVP(Manny V. Pangilinan) of TEL to PX(Philex Mining) and LC(Lepanto Consolidated Mining) raised their stock prices coupled by the bullish PSE market. I remember profiting 35% at my LC within two days of trading. A sudden change or better than expected performance of a company may also influence  its stock price. When the price of a stock is gaining momentum most investors suddenly buy that stock creating more price uptrend thus a surge of stock price in short period which may led the stock to be overbought and will suddenly drop when sellers are more than buyers...

Stock investing on the other hand primarily is about making the cost of the stock lower thus the concept of cost averaging come into the picture. Besides cost averaging investors look for companies with intrinsic value. Companies with long term potential but are currently undervalued are said to be one of the stocks with intrinsic value. The concept of intrinsic value was started by Warren Buffet. With this concept one must be patient enough to realize the expected value which mostly comes after 1 - 3 years or more.

Companies become better over time and as the company grows its value also grows. Fundamentally sound companies are one of the companies that one may consider as companies of value. These
companies may be one of the blue chips or maybe a small company that recently started but was able to withstand various financial crisis.

What now then is the best strategy when one enters the stock market?

The answer to this question depends on one's risk appetite.

Traders are seen as risk takers. Some may term them short term thus the terminology "going short" and other call them tsupitero or tsupitera. A common trait of a trader is establishing a comfort zone when trading and they ride the sudden uptrends and buying speculative stocks. Most establish a loss percentage of 5% meaning they sell their stocks if such is on or near the acceptable 5% loss level in order to invest their funds to a far better profit generating stocks. There is nothing bad with this idea since one enters the stock market to profit...only that this strategy is risky.

Investors or Value investors on the other hand has the patience to wait for that big price uptrend. They buy fundamentally sound stocks when they are or near floor prices. These people are happy when stock prices are falling(you might think their crazy) and they would always look for bargain. As time passes they accumulate and
make sure that the cost per share goes down as they buy more of the stock and when the stock price rises to up to 25 -50% that is the time they will release. It usually takes 6 months to 2 years or more thus patience is a key ingredient in value investing. At the same time one must be diligent enough to do research and analysis of the company before buying. 

The best way is to be both. One should establish a strategy to purchase some stocks for short term/profit taking  and establish some stocks to be for long term. To be able to fund one's long term goals one must have a continues source of funds which could come from short term trades.

Again rules to follow are the following:

1. Don't be greedy, moderate your greed when price of the stock is 

    near or on its TP(target price) sell and take profits

2. Research and investigate, when in doubt don't buy, trade at your 

    own risk

3. Cost-average

4. Always set aside emergency funds, always leave some free cash 

    for bargain buying

5. Only and only invest free cash

Is stock investing gambling?

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sources: http://www.game-bler.com/ , http://www.leap.us/

I had a chance to chat with my ex-girlfriend this week, and as usual the friendly chat is everything under the sun. (It is nice to have my ex-girlfriend as a friend without the hassle of looking back in the past so I hope all couples who parted ways could still be friends one way or another but again this is just my suggestion, an advice).

So I told her that she can invest in the stock market at only Php 5,000.00 and she said "isn't that gambling?" So I ask her why she think stock investing is gambling, she has two good points on her argument:

1. There is risk involved

2. The market is unpredictable

So I thought about it and answered her "I beg to disagree but stock investing is not gambling."

This kind of thinking is one of the reasons why the Philippines has a very small percentage of its population engaged in investing. Filipinos are afraid to even try it because of the stories they hear for example a businessman who invested all his money in a particular stock is now in debt and without work because the stock he bought crashed big time. Another reason is that  people think that companies are just using their money for personal gain thus they don't want to participate in the stock.

Going back to the important things one must always remember when one starts to or even decide to participate in the stock market:

1. Invest only your free cash.

2. Invest in stocks of fundamentally sound companies

3. Always learn and don't stop learning

4.You only lose when you sell your stock below your total 
    purchased cost

5. Time the market

Let me relate these pointers why stock market is not gambling.

Gambling is when one puts everything he or she has against something which is uncertain, relying only on pure luck. That is why I and my friends have always advice to only put your free cash in the stock market. Yes it is due to the risk involved that everyone sees it as gambling. But the risk in stock market is what we call a calculated risk. You can always decide whether to go on or not in buying or selling because we have a basis like financial report and performance, on time news updates, and regulatory bodies that implement laws that safeguards us investors unlike in gambling where due to your desperation to recover your loses you bet your last centavo hoping against all hope that you will win this last time around without any basis. It is so calculated that is why we even advice only your free cash to really make sure you don't regret if the stock you bought will be at a negative for quite some time.

There are stocks that we call speculative and their are what we called fundamentally sound. The good thing at investing in stocks with good fundamentals is that no matter what happens they wont easily be affected by financial troubles. They will surpass and will remain standing, and they will be there and will still give you profits in times of harsh financial conditions.

Stock investing commands continues learning or what the Japanese termed Kaizen. Even the veteran like the likes of Warren Buffet still do their homework doing due diligence before buying stocks of companies. Probably this is one of the reasons why so many avoid the topic or even the idea of investing in stock, its nosebleed. With the so technical and so complex concepts and words to learn many have avoided it. But I always say this, you are the investor so don't be afraid to ask. Many think that it cost a lot to learn about stock investing but with the invention of the internet information is all around us.... and one of the best ways to learn is to share what you know and listen to other person's perspective. Always remember always be humble to learn about stock investing even if you have a PhD degree or MBA.

Again many people are afraid to invest in stock market because they think they are losing when their portfolio is in the read. I remembered when I first made my first investment: mutual fund at Philamlife. At that time it was the beginning of the subprime crisis in the US. I asked the fund manager who was also a former seminarian like me and said that the problem why the market continues to fall is because people panic and starts to withdraw form the stock market thinking that they will lose there hard earn money. In accounting we call this unrealized loss or in layman's term paper loss. This is, as the term says, not real loss. As long as one does not sell a stock which has a value lower than one's purchase cost, one has not lost yet. It only becomes a lost when it is realized by way of selling it below its purchased cost.

That same thing applies to the stock market, remember they are just the same that they are traded in the market but with this difference: no matter how good quality a mango is it will still rot, no matter how bad the times is a stock with good fundamentals will still stand after the storm.

I have this idea why people lose in the stock market, they look at it as gambling thus they do gambling approach by betting all they have on wrong stocks without proper timing, impulsiveness, and limited information. That is why I started blogging about stock investing to share my ideas at the same time attract ideas of others. In a way it is a collaborative way of learning by looking at others perspective.

Though it is not gambling I would like to borrow my friends advice---- trade at your own risk :)