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New Age ideology Thinking beyond stock market lull

Thursday, October 4, 2007

When it rains it pours.

How many times have you said this when something negative has happened to you? I, for one, can tell you that it was one of my most used sentences until recently. My best friend introduced me to the New Age ideology known as the law of attraction. As defined by Wikipedia the law of attraction states that people experience the corresponding manifestations of their predominant thoughts, feelings, words, and actions and that people, therefore, have direct control over reality and their lives through thought alone. Thus, a person’s thoughts (conscious and unconscious), emotions, beliefs and actions are said to attract corresponding positive and negative experiences or “harmonious vibrations of the law of attraction.” In other words, the “law of attraction” states “you get what you think about; your thoughts determine your experience.”

While this theory has received intense criticism from multiple circles in the media, the scientific community and even other areas of the New Age movement; I thought that instead of writing another article about the negative feelings towards investment in the local stock market, that something of a more optimistic nature might breathe positive energy into its veins.

I am not saying that by simply thinking that you are going to get rich that you will. But, maybe if you see the stock market in a more positive light, you and others alike may be more confident which, in turn, can exude some positive market sentiment.

So, let’s focus on the good.

To start with, fiscal 2007 has indeed been a year of growth for a lot of the companies listed on the local market. This growth has been across all sectors.

1.In the banking sector, FirstCaribbean International Bank (FCIB) reported a substantial increase of 21 per cent in earnings year-on-year for its nine month period in FY2007. FCIB has consistently been showing growth in earnings over the last five years and based on forecasted multiples, this share has an expected 12 month return of approximately 22 per cent. Our local conglomerate, Neal and Massy Holdings Ltd (NML) is another example of exceptional growth, reporting earnings per share (EPS) of $2.74 for the nine-month period ended June 30, up an outstanding 32 per cent when compared to the same period in the last financial year.

We have forecasted an expected 12-month return of approximately 17 per cent for this company.

2. In the manufacturing arena, Trinidad Cement Ltd (TCL) and its subsidiary Readymix West Indies Ltd (RML) saw enormous growth after having some problems in fiscal 2006. TCL was up a noteworthy 85 per cent half year 2007 on half year 2006, while RML was up an astounding 660 per cent. The prospects for both companies in 2007 are very optimistic and this has been reflected in the performance to date. The companies mentioned above provide just a snap shot of the positive fundamentals and attractive returns in the market.

In fact, as stated earlier, you will find this kind of double- digit growth in at least one company in each sector.

This brings me to my next point. With earnings growing at a much faster pace than share prices, the subsequent effect has been lower price-to-earnings multiples. Just as the name implies, a price-to-earnings multiple is a valuation ratio of a company’s current share price compared to its per-share earnings.

Generally, the lower the P/E multiple: the greater the possibility for higher returns. Please note that I have said “generally” as there are various factors which must also be taken into consideration before making an investment decision. Graph 1 shows the average market P/E multiple over the last nine years as at September 30. The mean over the period is approximately 13 times and for 2007 the multiple as at September 30 stood at 10.40 times (point C).

This means that the market is currently trading at a discount of 20 per cent to its average over the last nine years. Also interesting to note, is that following the trough at point A, the Annualised Five Year Return to point B was 19 per cent.

As we enter the last quarter of the year many investors are trying to predict what their net position will be at the end of 2007, that is, whether the market is going to be above or below its starting point. Since we don’t have a crystal ball, the next best thing would be to look at the past for some sort of trend or indication as to what the future might hold.


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