Financial Adviser: 5 Cheap Stocks that Offer Good Value and How to Profit From Them
There is no doubt that the economy faces a period of lower growth, if not contraction, in the months ahead.
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This recession will create a new reality for many companies who are struggling to endure this crisis. Some companies may need to rethink their business model while others may have to shut down their operations.
History has shown that during these difficult times, it is the financially stable companies that will eventually survive. Companies with a strong balance sheet and steady cash flows will most likely thrive in the aftermath.
Investing has always been focused on growth because the stock market expects earnings to go up, but in a recessionary environment like this, where earnings are anticipated to fall, investing must focus on value.
There are many stocks in the market today that are trading below their intrinsic values because they have been either overlooked by the market or sold down too low out of fear.
While investing in the stock market at this time can be very risky because of the uncertainties caused by the ongoing coronavirus crisis, it can be profitable if you invest in the right companies.
Finding the right stocks to invest means spending time in knowing the companies you plan to put your money into.
How does the company protect its cash position? How will the company endure in the slow growth economy? What is the value of the stock compared to its share price?
Here are the top five value stocks every investor must know and how you can profit from them:
1| GMA Network, Inc
GMA Network (PSE:GMA7) is one of the leading broadcasting companies in the Philippines, operating a network of 47 VHF and 41 UHF TV stations, as well as 24 radio stations throughout the country.
About 89 percent of its revenues comes from television and radio airtime while the remaining 11 percent comes from production and other media-related businesses.
Earnings of GMA7 have grown by an average of 7.3 percent per year from P1.6 billion in 2012 to P2.6 billion in 2019 on the back of annual revenue growth of 4.5 percent.
This year, GMA7 reported that its six-month earnings for 2020 grew by 4.2 percent to P1.4 billion compared to P1.35 billion from the previous year despite a 14.7 percent drop in total revenues due to the coronavirus lockdown.
The slight increase in net income was brought about by the increase in gross profit margin, which rose to 71.8 percent from only 59.9 percent last year as production costs decreased by 40 percent due to the pandemic.
The closure of the company’s biggest competitor, ABS-CBN is expected to increase its revenues from advertising placements in the second half of the year, which should support further growth in earnings by year-end.
GMA7 enjoys a strong balance sheet with current ratio of 2.2 times and zero debt. The buyback of the Philippine Depository Receipts (PDR) shares it issued in 2007 will not affect its cash position as a bulk of these were issued by its affiliate, GMA Holdings, on behalf of the existing shares of the controlling stockholders.
GMA7 has been a consistent dividend payer for the past years although its cash dividends have been declining from P0.73 per share in 2017 to P0.30 this year.
Even at this year’s cash dividend of P0.30 per share, current share price of the stock at P5.01 is currently trading at a dividend yield of 5.9 percent.
Prospects of higher earnings growth with bigger market share in the next three years, despite slowdown in the economy, should help the stock to appreciate in the long-term.
2| SPC Power Corporation
Formely known as Salcon Power Corporation, SPC Power (PSE:SPC) is in the business of power generation and distribution through its various operating subsidiaries in Iloilo, Naga, Bohol and Cebu.
About 67 percent of SPC’s revenues is contributed by power generation while the balance of 33 percent from power distribution.
Revenues have been growing by an average of two percent annually for the past six years from P2.4 billion in 2012 to P2.8 billion, which translates to an increase of nine percent in earnings every year, from P996 million in 2012 to P1.8 billion in 2019.
This year, SPC reported that its total revenues for the first half of the year declined by 34 percent to P969 million from P1.5 billion in the same period last year.
But despite the fall, the company managed to grow its net income by 0.6 percent to P929 million due to the higher income bookings from its investment subsidiaries, which registered 24.7 percent growth.
SPC is in a strong financial position with current ratio of 9.4 times with zero debt outstanding. The company also has a high average return on equity ratio of 18 percent.
Like GMA7, SPC has also been a consistent dividend payer for the past years. The company paid P0.40 per share as cash dividend last May and it is expected to pay another dividend this December.
Assuming it pays another P0.40 per share, this will give the stock a dividend yield of 9.5 percent at current price of P8.40 per share.
Although the stock price has more than doubled since 2015, the stock is trading at only seven times Price-to-Earnings (PE) ratio, which is roughly half the market average.
3| Nickel Asia Corporation
Nickel Asia (PSE: NIKL) is the largest producer of lateritic nickel ore in the Philippines and one of the largest nickel companies in the world. It also has a growing interest in renewable energy development.
NIKL operates four major mines: Rio Tuba in Bataraza, Palawan, which has capacity of 24,000 tonnes of contained nickel; Taganito in Surigao del Norte, which has 36,000 tonnes capacity; Hinatuan in Surigao del Norte and Cagdianao in Dinagat Islands.
The company is also into renewable energy business through its 86.3 percent subsidiary, Emerging Power, Inc., which operates 32 MW solar plant in Subic Bay freeport that it plans to increase to 100 MW in 2021 and geothermal service contracts in Mindoro and Biliran.
NIKL’s revenues, 92 percent of which come from ore and limestone sales, have been growing by an average of 14 percent for the past 10 years from P4.7 billion in 2009 to P17.9 billion last year.
This growth in revenue has resulted in 24 percent annual growth in net income from P303 million in 2009 to P2.7 billion in 2019.
This year, because of the strict quarantine implemented in the second quarter, NIKL reported that its total revenues for the first six months fell by 11 percent to P6.6 billion from P7.5 billion in the same period last year.
The fall in revenues caused the company’s net income to decline by 26 percent from P1.0 billion last year to P777 million.
NIKL’s revenues are expected to recover during the second half of the year due to increasing global demand for nickel.
The price of nickel over at the London Metal Exchange has increased by 33 percent since the pandemic started from $11,000 per ton in March to $14,649 per ton today.
NIKL boasts a strong cash position of P10.7 billion with a current ratio of 2.0 times and zero net debt-to-equity ratio.
The company has paid total cash dividends of P0.30 per share this year, which brings its dividend yield to 9.8 percent at current price.
The stock, which has fallen to a low of P1.54 during the market crash in March, has since recovered to P3.07. With the uptrend momentum in nickel prices, the stock should revisit its historical high at P5.00 soon.
4| Ginebra San Miguel, Inc
Ginebra San Miguel Inc. (PSE: GSMI) is the maker of the world’s largest selling gin, Ginebra San Miguel, and is a part of San Miguel Corporation, the largest conglomerate in the Philippines.
GSMI’s core brands Ginebra San Miguel and market leader in Chinese wine, Vino Kulafu, comprise about 94 percent of the company’s revenues.
Net income of GSMI has been growing by an average of nine percent for the past 10 years from P701 million in 2009 to P1.7 billion last year on the back of annual four percent growth in revenues, which grew from P19.5 billion in 2009 to P29.0 billion in 2019.
This year, total revenues of GSMI for the first six months grew only by 1.0 percent to P14.8 billion from P14.7 billion last year due to the impact of the Luzon-wide lockdown in March that saw its total revenues in first quarter fall by 9.8 percent.
It was during the second quarter that total revenues recovered by 14.9 percent to P7.4 billion from P6.4 billion in the same period last year.
This increased the company’s net income for the first half by 28 percent to P1.2 billion from P979 million last year.
GSMI’s operating cash flows also almost doubled to P5.2 billion this year from P2.8 billion last year. This helped strengthen the company’s financial position with 1.5 times current ratio and 20 percent debt ratio to equity.
With alcohol being historically resilient during tough economic times, GSMI should be able to deliver decent earnings growth this year.
The stock is trading only at PE ratio of 5.9 times despite 33 percent rally in its share price this month.
5| D.M Wenceslao & Associates
DM Wenceslao (PSE: DMW) is an integrated property developer with an established track record in land reclamation, construction and real estate development.
DMW owns one of the largest land holdings in Metro Manila with a total area of 569 thousand square meters located in Aseana City.
The company derives about 64 percent of its revenues from leasing, while the balance of 36 percent is from the sale of condominium units.
About half of its rental revenues come from land rentals and the other half from building leases, which have 98 percent occupancy rate.
Ayala Land is one of the company’s largest tenants, occupying more than half of DMW’s leased land area.
Total revenues of DMW have been growing by an average of 12 percent per year from P2.8 billion in 2017 to P3.5 billion last year.
This translates to net income growth per year of 20 percent to P2.2 billion from P1.6 billion in 2019.
Despite the economic slowdown this year, DMW managed to grow its operating income by 25 percent for the first half to P947 million from P756 million last year on the back of 23 percent revenue growth.
DMW’s resilient leasing model has enabled it to boost its operating cash flows this year, which increased by 78 percent to P2.2 billion from P1.2 billion last year.
DMW’s strong cash position of P6.2 billion, which comprises about 50 percent of its current assets, allows the company to cover all its trade payables and interest-bearing debts, which amount to roughly P2.0 billion only.
The stock has been falling since last year, losing about 52 percent from a high of P12.46 per share to P5.95 per share today.
DMW, which has average return on equity of 12 percent, is trading only 1.01 times of its book value and PE ratio of only 8.5 times.
Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice [email protected] or follow him on Twitter @henryong888