February 2018 Reporting Season Review

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Mar 07 2018

In this week's Weekly Insights (published in two separate parts):

-The Battlelines Are Drawn
-February 2018 Reporting Season Review
-Conviction Calls

[Note the non-highlighted items appear in part two on the website on Thursday]

February 2018 Reporting Season Review

By Rudi Filapek-Vandyck, Editor FNArena

What is the most important focus for share market portfolios? Is it growth? Is it disruption?

Most commentators and professional investors have argued the former since the middle of 2016. I have been advocating the latter since 2015.

Maybe it's not a case of either this or that. Warren Buffett, in his recent annual missive to Berkshire Hathaway shareholders, and to investors across the globe, tried his best to dismiss rather simplistic labeling such as "value" and "growth". Good investing, Buffett argues, implies both are connected at the hip.

I'd argue the same applies to growth and technological innovation, which is what causes the disruption in many of today's industries. If the February reporting season in Australia has proved one thing, it is that for successful investing in the Australian share market, growth and disruption are best seen as co-joined twins connected at the hip.

"Value", as defined by forward looking Price Earnings (PE) multiples, more often than not confused investors, and proved them terribly wrong on numerous occasions. February 2018 was the reporting season in which High PE market darlings significantly outperformed their lower priced peers, with their financial results outperforming market expectations, forcing analysts to increase forecasts, and share price valuations - often by double digit percentages.

The pain for shorters, and for many other investors who found themselves on the wrong side of the trade, was extra confronting since it had become a popular view that inflation is coming, interest rates and bond yields are on the way up, and high PE stocks should be avoided for risk of de-rating.

Yet the exact opposite happened in February, despite the fact the month opened with increased volatility and selling pressure as the world watched US bond yields lift and anti-volatility derivatives implode. Best performing sector for the month, by a long stretch? Healthcare, led by High PE outperformers CSL ((CSL)) and Cochlear ((COH)). Information Technology (IT) also proved a stand-out, equally led by High PE outperformers Computershare ((CPU)), REA Group ((REA)), NextDC ((NXT)), Altium ((ALU)), and numerous others.

[Note: I do not agree with the inclusion of Computershare, REA Group and NextDC, but the IT sector index promoted by the ASX does include these names, as well as Domain Holdings. Hence for the sake of simplicity, I'll just stick by it for the purpose of this review].

On the other end of the spectrum, cheap looking out-of-favour stalwarts such as Harvey Norman ((HVN)), QBE Insurance ((QBE)), Myer Holdings ((MYR)), Vocus Communications ((VOC)), IPH ltd ((IPH)), Asaleo Care ((AHY)) and iSentia ((ISD)) simply continued their bad news cycle, and share prices are sharply lower in the aftermath of yet more disappointing financial results.


One should never forget, in the short term, reporting season is all about market expectations and how the financial performances that are being released compare to those expectations. Hence, immediate share price responses are not always an accurate indicator of what follows next.

One relationship is direct and undeniable: if analysts are forced to upgrade or downgrade their forecasts and valuations, the share price virtually always follows suit, unless the price is already accounting for it. The stand-out example this February was delivered by a2 Milk ((A2M)) with many an expert adopting a cautious approach beforehand given the share price had quadrupled over the prior twelve months. But since January 1st, a2 Milk shares are up more than 40% (not a typo) and most of these gains have occurred on the day the company released its interim financials.

FNArena subscribers can observe via Stock Analysis on the website how earnings forecasts and stockbroker valuations equally jumped higher since that day. Today, consensus target sits double digit percentage above a sideways moving share price.

Seen through the prism of stockbroking analysts expectations, February 2018 delivered one of the best reporting seasons for corporate Australia over the past five years. FNArena statistics are not definitive as yet, but on our assessment some 37% of 318 reporting companies throughout the season have clearly beaten market expectations. This is equal the highest percentage with February 2016.

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