In the first few weeks of 2013, we have witnessed the record breaking performance of the Philippine Stock Exchange’s main index. Now everyone is wondering, what will happen next?
Is it a good time to invest?
A lot of people are saying that it is no longer a good time to invest because stock prices have gone up and are therefore expensive. However, if you base your investing decisions on the stock price alone, you will never go forward. Imagine if the stock prices are high just like today, you will not invest because you think it’s expensive. On the other hand if it is going down, won’t you be scared to invest too?
That is why looking at the stock price alone will not tell you much. Sadly, a lot of people are speculating and talking about the things that they know little of. They are saying that the stock market is expensive. Based on what? Is “Company X” more expensive compared to its peers from the same industry? Or it is just “expensive” in general?
There is a growing sentiment that it is better to invest in other countries where stock markets are “undervalued”. I bet the amount of money that you will use to invest in a foreign “cheaper” stock market will cost you more. In order to invest in the stock market abroad, you need to open a local bank account, know their rules, their government and economy. You also need to have a broker in that country. You might as well just invest in your own country.
Having said these things, how can we truly value the stocks in the Philippine Stock Exchange nowadays? Are they really expensive? How can we make an intelligent choice?
This is where fundamental analysis comes into play. Fundamental Analysis is a method of valuing stocks by attempting to discover a company’s fair value.
Through fundamental analysis, you try to discern what a company’s intrinsic or fair value is. It will help you determine which stock is more expensive than the others. This way, you can base your decisions on thorough research and actual data rather than market tips, rumors, and innuendo.
If you compare the Price to Earnings (P/E) ratios of several of the biggest and best companies of our country from 2011 up to today, you will see that they are actually dropping. What does this mean? It means that if we look at how much we have to pay for one peso of earnings today, companies are actually cheaper compared to the past few years. Yes, the actual stock price may be higher than before but since companies make more money today than they did before, you don’t have to pay as much to get those earnings.
Factors such as a better economy, recent mergers and acquisitions, new products, additional branches etc result in bigger and more profitable companies. This in turn results to higher valuations and higher stock prices for the businesses.
Remember, next time someone tells you that the market is “expensive”, ask them “Based on what?”