Financial Adviser: 5 Worst Performing Blue Chip Stocks in the First Half of 2022 and How to Profit from Them

Contrarian investing philosophy teaches that the rewards of standing apart from the crowd and investing intelligently, even when it is not “popular” or rewarded in the short term, are substantial over the long term.

Investing at a time when the market is on a downtrend may not be what everyone else doing, but may offer opportunities for huge potential returns in the long-run.

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The PSE Index has lost as much as 20 percent since it peaked in January and may lose some more in the coming weeks towards 6,000-level as market sentiment continues to be bearish.

Latest inflation figure for July has accelerated to 6.4 percent, the highest in four years since 2018, while 10-year bond yield and the exchange rate remained high at 6.22 percent and P55.55 to a dollar, respectively.

While most stocks nowadays may look cheap, there is no assurance that a sustainable recovery is underway. In fact, share prices may get cheaper with the prevailing market pessimism. 

It may probably take some time before the market finally recovers. In the meantime, it will be good for investors to be aware of the potential value stocks in the market.

Stocks that have tumbled the most have the highest potential of providing huge returns when they recover, although not all badly beaten stocks will recover first. 

Three of the five worst-performing blue-chip stocks in the first quarter 2022 that we featured recently in this column have recovered so far, though overall year-to-date return is still negative.

These stocks are AC Energy (PSE: ACEN), which has improved from first quarter by +1.49 percent; Universal Robina Corp (PSE: URC), +1.32 percent and Monde Nissin, +15.33 percent.

The other two stocks that have further declined are Puregold (PSE: PGOLD) and Globe Telecom (PSE: GLO).

For the first half of 2022, let’s take a look at the five biggest blue-chip losers to date and where you can possibly pick them up:

1| Globe Telecoms, Inc

Price: P2,010

Year-to-Date Loss: -39.49 percent

Globe Telecoms (PSE: GLO) is the leading telecommunications and technology provider in the country with 86.8 million mobile subscribers, 3.7 million home broadband customers, and close to 1.3 million landline subscribers.

About 51.5 percent of GLO’s revenues comes from mobile data, 19.4 percent from home broadband, and the 20.7 percent from mobile and fixed line voice.

Last year, GLO’s total revenues grew 4.0 percent to P167.7 billion from P160.5 billion in 2020, but operating income margins declined from 15.8 percent in 2020 to 13.7 percent due to higher general and administrative expenses and financing costs.

Despite the lower operating income, GLO booked a one-time gain of P4.3 billion, resulting from the dilution of its ownership in Mynt, the operator of GCash.

The one time-gain enabled GLO’s net income to increase 27 percent from P18.6 billion in 2020 to P23.7 billion in 2021. But without it, GLO’s income before income tax would have declined by 8.8 percent.

This year, GLO’s total revenues continued to slow down, growing marginally by 1.6 percent for the first quarter to P43.5 billion from P42.8 billion in the same period last year.

But GLO managed to report net income of P13.6 billion, which is 85 percent higher than P7.3 billion in 2021 due to the one-time booking of non-recurring income of P10.7 billion from the sale of its data center business. Without it, GLO’s pre-tax income would have declined by 20.8 percent to P6.2 billion from P7.8 billion.

GLO is currently trading at only 9.1 times P/E ratio, cheaper than PLDT (PSE: TEL)’s P/E of 12.2 times.

Last year, GLO paid a total of P108 per share in cash dividends. Assuming it pays the same dividends this year, GLO’s expected dividend yield at current share price is 5.37 percent.

Further weakness in the share price should offer good opportunity to accumulate the stock. If we target dividend yield of 6.0 percent for GLO, a good price to buy should be somewhere at P1,800 per share level.

2| Converge ICT Solutions, Inc

Price: P20.00

Year-to-Date Loss: -37.3 percent 

Converge ICT Solutions (PSE: CNVRG) is the largest high-speed fixed broadband operator in the Philippines with a 55-percent market share for download speeds of 25 Mbps and higher.

CNVRG has been dominating about 60 percent of the new fixed broadband subscriptions over the past three years. About 77 percent of its total revenues is contributed by its residential business, while 23 percent comes from its high-speed fixed broadband solutions to companies.

CNVRG’s total revenues have been growing rapidly by an average of 69 percent per year from P1.9 billion in 2016 to P15.6 billion in 2020.

This growth in revenues has enabled the company’s net income to increase by an average of 56 percent per year from P574 million in 2016 to P3.4 billion in 2020.

Last year, CNVRG’s total revenues continued to increase, rising by 69 percent to P26.5 billion. The huge increase in revenues boosted its total net income to grow by 111 percent to P7.1 billion.

This year, CNVRG’s total revenues for the first quarter grew by 39.6 percent to P7.7 billion from P5.5 billion in the same period last year. This increased CNVRG’s net income by 27.1 percent to P1.97 billion from P1.54 billion in 2021.

If we follow earnings growth for the whole year, we can expect CNVRG’s total net income by year-end to reach P9.1 billion.

Recent fall in the stock price has brought down its Price-to-Earnings (PE) ratio to 19.8 times, which is relatively more expensive than Globe Telecoms (PSE: GLO) and PLDT (PSE: TEL).

But CNVRG, being a high growth company with revenue growth five times faster than GLO or TEL, the stock deserves a higher pricing premium. With the current negative sentiment in the market, CNVRG’s stock price may further fall that could narrow its premium gap against GLO or TEL’s pricing multiple.

Such fall should provide a good opportunity to accumulate the stock, which could soon test its historical low at P13.06.

At this target price, CNVRG’s prospective pricing multiple would fall to 10 to 12 times PE, which should be attractively comparable to TEL.

3| Ayala Land, Inc

Price: P25.90

Year-to-Date Loss: -29.4 percent

Ayala Land (PSE: ALI) is the largest and most diversified real estate conglomerate in the country. ALI is engaged in property development, commercial leasing and hotel operations.

ALI also owns 71.66 percent of Ayala Land Logistics Holdings (PSE: ALLLHC), the leading developer and operator of industrial parks and 66 percent of AREIT, Inc (PSE: AREIT), one of the largest real estate investment trust companies in the country.

ALI’s net income has been growing by an average of 21 percent per year from P7.1 billion in 2011 to a high of P33.2 billion in 2019 prior to the pandemic, on the back of strong revenue growth, which steadily increased by 17 percent annually.

But during 2020 pandemic, ALI’s net income plunged 73.7 percent, falling close to its 2011 net income at P8.7 billion for the first time in eight years. Since then, ALI’s net income has not yet recovered to its pre-pandemic level.

Although ALI was able to increase its net income last year by 40 percent year-on-year to P12.2 billion, as its total revenues increased by eight percent to P103.8 billion, its net income represents only 36.7 percent of its 2019 earnings.

This year, ALI’s total net income for the first half continues to recover growing by 33.7 percent to P8.0 billion from P6.0 billion in the same period last year on higher margins and lower operating expenses.

But if we use the average net income projections of top foreign brokers in the market, we can see that institutional investors expect ALI to end the year at P17.7 billion, which represents 45 percent earnings growth. The same market consensus also projects ALI’s net income to grow by 41 percent to P25 billion by 2023 and 18 percent to P29.5 billion by 2024.

The recent fall in the stock price of ALI at P22.55 per share has brought the company’s market valuation back to the 2011 era when the company’s net income was in the P7 billion level. 

But this year’s expected net income is no way near the P7 billion. At projected earnings of P17.7 billion this year, ALI certainly deserves a higher market valuation.

For reference, the last time that ALI’s net income reached P17 billion level was in 2015, and during that time, ALI’s stock price has averaged at P34.45 per share.

However, if we focus on the projected net income of ALI at P17.7 billion, given its modest recovery this year, we will derive a more reasonable prospective PE ratio target of 19.9 times.

Given this expected recovery, the current share price of P25.90 at prospective PE of 19.9 times offers a long-term potential upside of 45.7 percent to its historical PE of 29 times or P37.7 per share.

4| Megaworld Corporation

Price: P2.26

Year-to-Date Loss: -28.2 percent

Megaworld Corporation (PSE: MEG) is one of the leading property developers in the Philippines. It is primarily engaged in the development of large scale, mixed-used planned communities that comprised of residential, commercial and office developments.

MEG has developed over 20 integrated urban townships to date in the country, some of which includes Eastwood City in Quezon City, Newport City in Pasay City and McKinley Hill in Fort Bonifacio.

MEG’s revenues have been growing by an average of 14.3 percent per year in the past ten years prior to the pandemic from P17.7 billion in 2010 to P67.7 billion in 2019.

This growth has translated to annual earnings growth of 16.9 percent from P4.0 billion in 2009 to P17.9 billion in 2019.

During the 2020 pandemic, MEG’s total net income fell by 45 percent to P9.8 billion, as total revenues declined by 35.4 percent to P43.5 billion from a high of P67.4 billion in 2019. But last year, MEG’s total revenues recovered by 16.6 percent to P50.7 billion, bringing its net income to rise by 35 percent to P13.4 billion.

This year, MEG’s net income for the first quarter continued to improve, growing by 29.9 percent to P3.0 billion from P2.3 billion in the same period last year, as total revenues increased by 31 percent to P12.3 billion.

The recent fall in the stock price of MEG has brought down its Price-to-Earnings (PE) ratio to only 5.0 times, which is 53 percent cheaper than its pre-pandemic historical PE of 10.6 times.

MEG is also trading at 64 percent discount to its book value of P6.30 per share, which is comparably low given historical price-to-book value ratio at 1.0.

Given MEG’s strong earnings recovery, the market should eventually price the stock near its historical PE of 10.6 times, which will roughly double its current share to over P4.00 per share.  

5| Alliance Global Group, Inc

Price: P9.31

Year-to-Date Loss: -21.1 percent

Alliance Global Group, Inc (PSE: AGI) is one of the leading conglomerates in the Philippines, with interests in property development, food and beverage, and integrated tourism development.

AGI owns controlling interests in Emperador, Inc. (PSE: EMP), the largest liquor company in the Philippines and largest producer of brandy in the world, and Megaworld Corporation (PSE: MEG), one of the leading property developers in the country.

AGI also owns 49 percent of Golden Arches Development Corporation, the master franchise operator of McDonald’s Corporation in the Philippines.

About 32.9 percent of AGI’s total revenues come from Megaworld followed by Emperador with 36.3 percent; Golden Arches Development with 16.8 percent and Travellers group, 12.47 percent.

Total revenues of AGI have been growing by an average compounded growth rate of 17 percent prior to pandemic from P38 billion in 2009 to P180 billion in 2019. This steady increase in revenues translated to annual growth in earnings by 14 percent from P4.8 billion in 2009 to P17.7 billion in 2019.

In 2020, AGI’s total net income suffered a 50 percent decline to P8.8 billion as total revenues fell by 29 percent to P129 billion, but last year, AGI’s earnings quickly recovered to its pre-pandemic level, growing by 91 percent to P16.9 billion on the back of 18 percent revenue growth.

The stock of AGI is currently trading at Price-to-Earnings (PE) ratio of only 4.71 times only, which, similar to its subsidiary MEG, offers a huge 48.5 percent discount to its pre-pandemic historical PE of 9.1 times.

AGI is also trading at a great discount of 59 percent to its book value of Php23.4 per share. Further weakness in the stock price towards its historical support at P7.32 per share should offer a compelling opportunity to buy the stock.

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888