IF you needed any more confirmation that stock prices may not actually be connected to company fundamentals, you need to look no farther than the trading on the Philippine Stock Exchange (PSE) on August 24th.
It was announced that as of September 12th, the composition of the PSE Composite Index (PSEi) would be changed, as Security Bank Corp. (SECB) will be replacing Bloomberry Resorts Corp.
A stock-exchange index is supposed to reflect the overall movement and trading of the stock market. The guidelines for which issues will be included in the PSEi are specific. A company must maintain a “free float”—shares in public hands—of at least 12 percent of the total outstanding stock. Basically, it must be an actively traded stock with relatively large investor participation. However, to say that PSEi issues reflect the overall stock-market value may be a reach.
Of the 30 issues included in the PSEi, three are “Ayala” companies: Ayala Corp., Ayala Land and BPI bank. Three others are “SM” companies: SM Investments Corp., SM Prime Holdings and BDO. Three others are under the Gokongwei group and three under Andrew Tan’s Alliance Global companies. Two are part of Metro Bank’s holdings, two are Aboitiz companies, and two are “Lopez” companies. San Miguel Corp. controls two others, as does the Consunji Group of Cos. Therefore, 21 of the 30 PSEi companies are basically controlled by nine corporate groups.
What the PSEi actually reflects is the corporate and business structure of the Philippines, not necessarily the PSE. Even Bloomberry has a sister company included in the PSEi—International Container Terminals.
If a stock fund or asset manager wants to invest to track the PSE performance, they must own a weighted amount of all the issues included in the PSEi. Therefore, when a substitution is made, money must be shifted from the former component issue to the new stock. In this case, selling of Bloomberry dropped the price by 13 percent in one day. There was no fundamental change in the value of the company during that 24-hour period. It was just that the “rules” of the game changed.
One justification of the index composition change is that SECB’s market capitalization is more than double the size of Bloomberry’s. In 2014 Bloomberry stock price was worth 2.5 times as much as it is today, and SECB was valued 40 percent lower.
While market capitalization is important to the index composition, more important is trading volume. PAL Holdings—parent company of Philippine Airlines—is big but does not trade much.
DoubleDragon Properties Corp. is big, trades a lot of shares, but has only been public for a short time.
Is the corporate value of Bloomberry worth 15 percent less than it was a week ago? Probably not. But stock price and company value are always two separate issues that may or may not be related at any given time.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.