Do you know the types of stocks you are invested in?
Knowing what type of stocks you own can help you come up with an appropriate investment strategy.
Before investing in stocks, you might want to first understand what you are getting yourself into. Classifying stocks is part of the process. Knowing the unique characteristics of stocks can help you make more informed decisions and choose the most suitable investment strategy.
There are more than 200 listed companies in the Philippine Stock Exchange (PSE). In which of these buckets do your stocks fall into?
One way to sort stocks is based on the investment management strategy, distinct characteristics, risk and valuation. They can be classified under growth, defensive, speculative, and cyclical.
There are various ways to classify stocks. Here are four classifications that you may use to manage your portfolio better.
Investors who hold growth stocks generally employ a passive investment strategy which does not require regular monitoring. An example would be Metro Pacific Investments Corporation (MPI), which is into services, products, and infrastructure: power, toll operations, water, healthcare, rail, logistics, and others. Another is International Container Terminal Services, Inc. (ICT), which is into the international container cargo business.
The underlying corporations have superior investment projects which explains the substantial portion of their profits being retained. These stocks are usually undervalued due to asymmetric information.
Just like growth stocks, defensive stocks can be held without much monitoring. Consumer staples and stocks in the utilities sector constitute this category. These are considered defensive as their businesses are more likely to withstand economic downturns, with low business risk, and moderate financial risk. This is because their products or services are necessities at any point in the economic cycle. These stocks provide regular dividends and stable earnings.
Some of these defensive stocks include Manila Electric Company (MER), an electricity distribution company that operates in the cities and municipalities of Bulacan, Cavite, Metro Manila, and Rizal. It also covers certain cities, municipalities, and barangays in the provinces of Batangas, Laguna, Pampanga, and Quezon. Manila Water Company, Inc. (MWC) is another. It provides water treatment, sewerage and sanitation, distribution services, pipe works, and management services to residential, commercial, and industrial customers.
Speculative stocks are for investors who are constantly monitoring their investments given that prices of these stocks are volatile. Sectors which are included in the category are mining and oil, and IT companies with little or unpredictable earnings. These stocks are held for speculating (betting) a significant change in the business that may unlock value in the company like surge in earnings, getting big customers, or part of a merger or acquisition transaction. Due to investors speculating for things to happen which may not be the case, these stocks are usually overvalued. This is an extreme example of high risk investment with high potential return or loss.
Examples of speculative stocks would be Semirara Mining and Power Corporation (SCC), a company that operates in Semirara Island, Caluya, Antique, and Nickel Asia Corporation (NIKL), which is engaged in the mining of all kinds of ore, metals, and minerals as well as power distribution.
Cyclical companies are generally held as part of an active investment strategy. Cyclical stocks have businesses that perform better with a favorable economic environment. Real estate and financial institutions are sectors included in this category. These stocks are heavily influenced by overall market sentiment and general economic activity. Superior returns are expected during economic expansions, and poorer results (compared with defensive stocks) during contraction. That is why volatility is expected in their asset values.
Some examples would be Ayala Land, Inc. (ALI), a real estate company, and Metropolitan Bank & Trust Company (MBT), one of the leading banks in the country.
After knowing the types of stocks, you should carefully evaluate your current or planned portfolio and assess if the stocks you are holding are appropriate to 1) the economic environment – you may want to invest more money in cyclical companies when high economic expansion is expected; 2) your risk appetite – you should remember that holding speculative stocks or some rumored backdoor listings can provide high returns, but also big losses; and 3) your investment horizon – though equities generally entail a longer holding period than other asset classes, growth stocks require even more patience from the investor versus speculative and cyclical stocks which can be tactical, and defensive stocks which pay regular dividends.
ANNA DOMINIQUE CUDIA, MBA, CSS, is the Head of Markets Research at Metrobank’s Trust Banking Group, spearheading the generation and presentation of financial markets insights to internal and external clients. She used to be with Metrobank’s Investor Relations, where she brought in international awards and took part in various multi-billion peso and dollar capital raising activities. She has a Master of Business Administration (Finance) degree, with distinction, from the University of London, and a Bachelor of Science in Business Administration degree, cum laude, from the University of the Philippines. She is also a CFA Level I exam passer and a Certified Securities Specialist. She is a naturally curious person and likes to travel here and abroad.