Qualitative considerations in Bottom-Up Investing
DEN SOMERA
The last aspect in bottom-up investing is the evaluation of its management — an integral subject of interest in fundamental analysis. This is an aspect ignored in technical analysis because “market action discounts everything.”
All known information related to a stock is already reflected in its price action. New information like changes in the management’s lineup and/or performance are immediately reflected in a stock’s price as soon as they come into play.
References say the best way to evaluate management is to look at their compensation, attitude and capability in running the business.
Compensation is the easiest to access. This is found in the firm’s regulatory reports with the Securities Exchange Corporation (SEC). This is also disclosed in stockholders’ annual reports, although most likely in varying degrees of detail.
In whatever degree it’s disclosed, the “reasonableness” of management compensation can be uncovered when you connect the dots in the reports, so to speak.
Also, while there’s no hard and fast rule about the level and standard of management’s compensation, whatever they are, they should still be what common wisdom refers to as “reasonable.”
One listed oil exploration company reported a net income while another one reported a loss last year. Looking more closely, management of the latter company overcompensated itself that the firm eventually incurred loss.
“Reasonable” also applies to management compensation truly tied to performance. In the past, a management of a listed firm reduced its target revenues and earnings objectives but the potential reward for them stayed the same. That management was “unreasonably” bent in only getting paid higher more than anything else.
Reasonableness of management compensation can also be determined by knowing if they give too much loans (like car loans) and too many stock options, among others, to themselves.
This is no different from the situation of a firm giving higher pay to its management for actions that make the company bigger but not necessarily more profitable.
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It’s time to look at the overall results of the virtual stock trading challenge for Week 25.
Week 25 overall results
For Week 25 covering Aug. 20 to 24, the market opened and closed the week with losses. The Philippine Stock Exchange index (PSEi) closed last Monday with a day’s loss of 82.99 points or 1.09 percent and by 37.56 points or 0.48 percent on Friday.
Nonetheless, these were actually the only days last week when the market was down. When it resumed trading after the holiday break on Tuesday, the market made big advances in the next two days with a total gain of 303.05 points or 4.03 percent. This sent the overall market performance to fly with a weekly gain of 182.95 points or 2.41 percent.
Except for Dud67, all of the players directly benefited from this good performance of the market last week.
The trading tack taken by foreign investors during the period also had the usual impact it has on the market’s direction and trading outcome.
When the market closed last Monday, foreign investors were net sellers for the day. The market, then, fell with a day’s loss of 82.99 points or 1.09 percent, which was certainly abetted by the fact that their transactions accounted for 56.03 percent of total market transactions.
When the market picked up and headed north on Wednesday and Thursday, foreign investors were net buyers for the day. This happened as foreign investors were again visibly responsible for more than 50 percent of total market transactions.
Lastly, when the market fell on Friday, foreign investors were net sellers although they accounted for less than 50 percent of total market transactions. Nevertheless, that was enough to drive the market down.
What may have made the market revert to its old predictable behavior of falling into negative territory when foreign investors are net sellers – and move upwards when they are net buyers – was that average turnover for the week has gone back to about P7 billion per day.
Looking back, the market has become increasingly difficult to read and intractable on the basis of foreign investors’ trading sentiments when average daily turnover has gone down to just over P5 billion. Hopefully, this tractability of the market now will continue.
In the meantime, there are also significant changes happening in the contest. The players, especially Pixiu, Play Hard and Small Time Trader, now seem to find their groove and are giving their all in the game.
The biggest winner for the week, however, was Pixiu. Her return on investment (ROI) inched higher to 127.74 percent, up 3.25 percent. This was the biggest rate of growth realized by any player for the week.
HRB2015 retained his position as number two in the leaderboard with a performance rating of 101.57 percent
ROI, with his passive trading strategy of retaining a very large portion of his capital in cash. Due to the strength of his stock pick, however, his investment portfolio grew another 0.18 percent for the week.
It was Small Time Trader, however, who made a stunning performance for the week. He leapt from fifth place to third place in the leaderboard.
Small Time Trader overtook St. Michael, who was in fourth place, and dislodged young Play Hard from third place with a new performance record of 99.65 percent ROI. He had the second biggest gain for the week of 2.61 percent.
With this development, Play Hard is now trailing in fourth place with a performance of 98.30 percent ROI, up 0.52 percent from previous level.
Pulling up ahead into fifth place to dislodge and consign St. Michael into sixth place was Dondee Prime. With his new record of 98.08 percent ROI, Dondee Prime is now fifth in the leaderboard.
St. Michael is now down to sixth place with an ROI of 97.59 percent. Though that small, his investment portfolio still grew by 0.14 percent for the week.
Still in seventh place was Dud67. He was the only player with a recorded loss for the week of 2.28 percent with a performance record of 58.21 percent ROI.
Below are the details of their transactions for Week 25, covering the period Aug. 20 to 24, 2018:
Bottom line
Don’t miss the discussions on the qualitative considerations in “Bottom -Up Investing.” One of the best stock investors I’ve met had a very good winning record in the market by buying only in companies whose management has a track record of honesty and integrity over reported good financials.
Den Somera is a licensed stockbroker. The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. E-mail address of the writer is den.somera@manilatimes.net
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