Why is reporting season important?
Reporting season is important because it can highlight continuing positive and negative trends. Outperformers tend to continue to outperform and underperformers continue to underperform. Take the 3 best and worst performers in August 2018 in the ASX 200.
Top in August 2018: APX up 41%, ALU up 37%, BVS up 31%
Bottom in August 2018: SDA down 32%, SGM down 27%, PGH down 24%
The top 3 performers have managed to gain another 8% on average since the end of August, whereas the bottom performers have lost another 16% in that timeframe.
Most things in life are cyclical and when it comes to stocks, the same usually applies. Cycles makes predicting the growth or contraction cycles of companies easier to forecast. This means that companies that are accelerating earnings growth are likely to continue to grow. Conversely, companies stuck in a downgrade cycle are also likely to continue to see decelerating earnings growth.
Why do you sometimes see a company increase profit substantially and still the share price falls or conversely a company reports a loss but the share price pops?
Outperforming during earnings season is about exceeding expectations. It doesn’t matter if the company has managed to double profit, if the consensus was for the profit to triple. Since the market expects a tripling of profit, if the company delivers less than that, then the share price is likely to adjust to this new information by falling. That is why sometimes you see that a company has doubled or tripled profit but the share price falls. It’s a case of exceeding what is already priced into a stock.
Stocks that have impressed so far include:
Credit Corp Group Limited (CCP): US growth is impressive and should help to offset the slowing growth in Australia over next few years. This points to a company which continues to be in an upgrade cycle.
Idp Education Ltd (IEL): Student placement grew 40% and average prices were up 16%. With expansion into geographies such as Pakistan and Nigeria, rollout should help to underpin growth. In addition, digital courses/execution is another lever of growth for the business.
Stocks to avoid
Building: Avjennings Ltd (AVJ), Wagners Holding Company Ltd (WGN)
Cyclical: Eclipx Group Ltd (ECX), REA Group Limited (REA) Credit Corp Group Limited (CCP)
Expected outperformers/underperformers
Outperformance: Jumbo Interactive Ltd (JIN), Reliance Worldwide Corporation Ltd (RWC)
Retail under pressure: Michael Hill International Ltd (MHJ), Flight Centre Travel Group Ltd (FLT), Mcgrath Ltd (MEA), BWX Ltd (BWX)
My favourite stock: Insurance Australia Group Ltd (IAG)
Capital management will remain a focus. Excess capital should continue to build and the possibility of further capital returns supported if sale of residual holdings in Asia occurs. IAG is currently looking at options for holdings in India and Malaysia. Net earned premium and margins should continue over next couple of years.