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The 1993 bull run of the Philippine stock market brought high optimism and expectations as investors flocked to the scene. With the market reaching new highs, investors realized huge capital gains in their portfolio. This much sought-after hype translated to even more people investing in the market — this time, however, through impulse and rumors. As the bubble started to burst sometime in 1997, many were still investing heavily in high-risk stocks and had no choice but to eventually sell their holdings at a loss, eventually causing panic and deflation of wealth.

I myself am generally bullish; I see the market as a basin of opportunity — whether the number indicators are up or down. You just have to know how to read signs. In any case, investors — bullish and bearish alike — should always remember reverting to basics, revisiting fundamentals supporting the run, back to Investing 101.

Fundamental analysis deals with analyzing economic and political conditions, the industry under discussion, and finally a company’s business health. Logical, yes, but when the hype and the adrenalin start rising, many seem to forget why they invested in a company in the first place.

THE ECONOMY: The economic and political aspect measures the aggregate financial situation of a country. Indicators such as GDP, inflation, money supply, interest rates, and budget deficit are some of the statistics that provide you with a sound health check of the country. For instance, currently, strengthening OFW remittances and direct foreign investments in the country have produced favorable growth in the economy, thereby improving our foreign exchange reserves, reducing the budget gap and lowering interest rates. These data are readily available and, if efficiently utilized, can yield a fiscal outlook of what the country’s future will be. A general knowledge of political issues is also taken into consideration, to assess the country’s risk factor.

THE INDUSTRY: Industries, just like the products/services produced, are subject to a lifecycle — introduction, expansion, maturity, and decline. Some generally perform better than others with the level of maturity, adoption of technology, government programs and saturation level. As such, it is important to identify what cycle the industry under review is currently in. Case in point, the mining industry is between introduction and expansion stage, mainly due to the government’s active promotion stance for this segment. In fact, the Philippines has one of the best-prospected, underdeveloped mineralized areas in the world. You can better position your investment once you have understood the lifecycle of a sector you intend to invest in.

THE COMPANY: Once we have established we’re in a favorable economic atmosphere for investments and knowing which sector can maximize yields, company analysis is next. As a rookie, my funds are parked in firms I am familiar with. Based on my present portfolio, however, I have broadened my scope, specifically in stocks that have solid history, growth potential, financial strength, excellent management and most importantly, a vision.

Understanding the “personality” of the company is half the work. The other half is examining indicators — textbook-talk, yes, but numbers do not lie. These facts measure profitability, growth, and financial health in their balance sheet; future plans and prospects are identified and priced in their valuations. Some commonly used valuations include price-to-earnings (P/E) ratio, price-to-book value (P/BV) and net asset value (NAV). P/Es and P/BVs are used to gauge how a company compares with the industry, on the average, specifically if they’re under-, over- or fairly-valued. For example, a company with P/Es of 10x versus industry’s 15x is deemed undervalued. On the other hand, listed stocks with P/Es closer to industry, is performing fairly average. Another ratio to monitor is NAV, or the market value difference between the company’s assets and liabilities. It tells us how much would be left for shareholders if a firm were to cease operations, and settle debts.

Thanks to facilities available online, I’ve taken the smarter route hastening the skills I need to sharpen my stock selection, especially on price entry and exit targets. The end result is the level of confidence one gets, especially when risk-return profiles are balanced for improved portfolio gains.

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Chase Yap is the vice president of 2TradeAsia.com.  For comments/queries, e-mail him at [email protected].