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Rudi’s Comprehensive August 2018 Review

Feature Stories | Oct 26 2018

Download related file: FNArena-Reporting-Season-Monitor-August-2018

The story below is a compilation of stories relating to the August 2018 corporate reporting season in Australia, published between late July and early September. Attached is FNArena's final balance for the season.

Content:

-August Reporting Season Preview: Potential Beats & Misses
-Early Beginnings Not AbFab
-August Results Thus Far: Quality, Costs And Dividends
-August Results Thus Far: Less 'Misses' Are A Positive
-August 2018 Reporting Season: The Final Verdict
-August Reporting Season: The Final Snippets

By Rudi Filapek-Vandyck, Editor FNArena

August Reporting Season Preview: Potential Beats & Misses

As the wide gap in valuations between "growth" and "value" stocks continues to dominate the Australian share market, general views and opinions from stock market experts have opened up a new Grand Divide.

When exactly are we going to witness the Big Switch out of popular winners into cheap looking market laggards?

Back in January, investors had decided to cautiously take some money off the table, paring back share prices in high-flying, popular growth stocks before their interim results releases were due. But as most of them outperformed expectations, soothing general discomfort about elevated valuations, fully valued, High PE stocks turned themselves into the undisputed winners of the February reporting season.

Yet another frustrating experience for those whose mandate and mindset is restricted to buying into cheaply looking, if not beaten down, out of favour share prices. It has been a tough five years, and February did nothing to sooth the pain.

Five months later and the Grand Divide remains alive and well. Top of the Pops benchmark CSL ((CSL)) refuses to sink well below $200, and we could easily use Macquarie Group ((MQG)) -still above $120- or Cochlear ((COH)) -still above $200- as an equally fitting example, though smaller cap technology stalwarts including Altium ((ALU)), WiseTech Global ((WTC)) and Appen ((APX)) have seen the pullback everybody had been waiting for.

Time For The Big Switch?

If it were up to stockbroker Morgans, investors should divest more High PE stocks and re-allocate the proceeds into "value" stocks including mining, energy, staples, media and selected retailers. Morgans is convinced that a switch away from popular High PE stocks into forgotten about and ignored low PE stocks is but a catalyst away, and every week the switch doesn't occur is one week closer to when it will actually happen.

It is such mindset that leads Morgans to suggest that CSL is primed for failure & punishment this reporting season, a view categorically denied by multiple analysts elsewhere. Numerous sector reports in recent weeks have come out in support of owning shares in healthcare leaders CSL and ResMed ((RMD)). Analysts at Wilsons simply declared: those are the stocks investors buy high and watch them go higher.

Instead, many see a rather mixed picture among healthcare services providers and smaller cap peers. Wilsons thinks Mayne Pharma ((MYX)) is a prime candidate for disappointment. Others nominate Ramsay Health Care ((RHC)), but Cochlear is also mentioned here and there.

Index With No Fuel Left?

Whatever the detail and specifics, it appears few dare to predict this year's August reporting season will provide sufficient fuel for the ASX200 to break out to the upside. Stockbroker Morgans thinks rotation will become the defining feature, with the major index range bound as a result.

After all, the market's average PE ratio sits at just under 16x with the average for high performing, sustainably looking industrials stocks above 20x. This ain't no 2009 bottom fishing exercise, to put it mildly.

Strategists at Morgan Stanley hold the exact opposite view: share market laggards, in their view, are going to prove why they have been lagging and why their share price valuation is nowhere near the likes of ResMed and CSL. Those super-duper high quality performers, on the other hand, are most likely to perform, but less likely to significantly outperform which also means the index's upside potential remains restricted; but without the rotation Morgans is craving.

Investors should note Nanosonics ((NAN)) is also mentioned multiple times for potential disappointment this month. In stockbroker's Morgans defense, ResMed did report on Friday and the result wasn't quite what most analysts had penciled in, in particular with the stock having been nominated multiple times for its upside surprise potential. The share price has since seen weakness, though by no means to the extent of what stocks like Janus Henderson ((JHG)), Integrated Research ((IRI)) and Ardent Leisure ((AAD)) had to endure after they delivered a negative surprise recently.

Earnings Growth Robust, Albeit Slowing

In general terms, average EPS growth should again remain well above historic averages, but mainly because of ongoing tailwinds for miners and energy companies. Strip these out and there remains an underlying net profit growth of circa 8%, which is far from bad given the banks continue to depress the overall average. It is also markedly below the double digit growth pace from FY17 and equally well below the double digit pace witnessed in offshore markets.

Bifurcation remains the key word when it comes to the Australian share market, and August is widely expected to add further evidence to this. Key question then remains: are market expectations low enough for under-pressure laggards to positively surprise?

Reading through copious amounts of previews published in recent weeks, it appears here too opinions remain divided. Note, for example, how some analysts are still pointing out that low expectations should make it easier for perennial disappointer QBE Insurance ((QBE)) to meet or beat market consensus, but nobody is prepared to make this a call with conviction.

Too many negative surprises will do that to anyone.

Every reporting season has its marquee disappointment. This time around virtually nobody believes Domino's Pizza ((DMP)) will deliver in line with its own guidance for 20% growth. The share price has moved from $50 to $38, back to $54 and now around $50 again. Clearly, now that everybody is convinced FY18 will be a "miss", the real discussion is what lies in store for the year ahead?

For Domino's Pizza, as well as for most companies reporting this month, investors will be keeping a keen eye out for rising costs, dividends, capital management, and future guidance. Note resources stocks are currently also held for their potential in dividends with further capital management, but Rio Tinto ((RIO)) last week disappointed and the share price was instantaneously pulled lower, even sinking below the 200 moving average.

There is probably a valid message in these observations: miss expectations and thou shalt be punished. If you happen to be concerned about some of the constituents in your own portfolio, there is still time to take some money off the table and reduce risk.

Witness also Seek's ((SEK)) market punishment following an underwhelming guidance for the year ahead. But then, FlexiGroup ((FXL)) shares dropped -13.6% after announcing the new CEO will be leaving, and those shares are still on a single digit PE.

Asaleo Care ((AHY)) remains out of favour and poised to once again highlight the danger of owning high yield stocks while watching the rear view mirror. Just about everyone is convinced here comes one of the monumental cuts in dividends for this reporting season.

Valuations And Risks

Some analysts have made the suggestion this is what most likely will colour the August results season: large pull backs and sharp rallies in individual stocks, but overall not much to write home about in terms of broader market/index movement.

Apart from elevated valuations in selected sectors and segments, investors are worried about the downturn in housing prices and how this might impact on companies and sectors. In some cases, there is the suggestion that a sudden uptick in consumer spending recently might allow companies including JB Hi-Fi ((JBH)), Specialty Fashion ((SFH)) and Woolworths ((WOW)) to deliver a positive surprise, but in case of the former two (and their peers) there is also the big question mark whether this might prove a temporary resurrection only.

Credit Suisse seems convinced the risk for Woolworths and Wesfarmers ((WES)) is to the upside, but in particular so for Premier Investments ((PMV)). Harvey Norman ((HVN)) has been singled out for the most likely negative surprise in the sector.

UBS has a broader framework and likes Woolworths, Treasury Wine Estates ((TWE)), Premier Investments and Adairs ((ADH)) for positive surprise potential. Myer ((MYR)), on the other hand, is once again nominated for a potential disappointing results release.

When The Credit Crunch?

Those who are focused on signals of a pending credit crunch in Australia are seeing signs accumulating. UBS points at declining car sales impacting on Autosports Group ((ASG)) and Automotive Holdings ((AHG)). It is probable this is also weighing on Carsales ((CAR)) with Morgans highlighting Carsales seems the only one in online media that is not priced for perfection.

Morgans also believes any share price punishment for either Domain Holdings Australia ((DHG)), REA Group ((REA)), or Seek will provide longer term opportunity. The stockbroker also points out some of the smaller e-commerce stocks are all cheaply priced, including Redbubble ((RBL)), Frontier Digital Ventures ((FDV)), and iCar Asia ((ICQ)).

In terms of earnings estimates momentum leading into this year's August season, the tide has favoured energy (on higher oil prices), staples and media with overall negative momentum descending upon telcos, consumer services and financials. Regarding the latter, banks carry low expectations, while Credit Suisse has also nominated Computershare ((CPU)), Janus Henderson and Netwealth Group ((NWL)) for a negative surprise.

Janus Henderson proved Credit Suisse was correct with at least one.

Insurers And AREITS

General insurers are definitely enjoying positive operating momentum, but questions are lingering whether QBE can finally deliver a "clean" result; whether AMP ((AMP)) can keep funds outflows limited; whether Insurance Australia's ((IAG)) valuation is pricing in too much?

Among AREITs the general concern is with shopping mall owners' exposure to retail shops, as well as about the future impact from the housing downturn. There is discussion about what is already implied in today's share prices, leading UBS analysts to prefer Vicinity Centres ((VCX)) and Scentre Group ((SCG)) in the sector while seeing risks as to the downside for developers Stockland ((SGP)) and Mirvac ((MGR)).

Others like Morgan Stanley continue to prefer those with an active earnings growth profile, providers of office space, or developers that can use their capital effectively during the downturn. As stated earlier, Morgan Stanley is not so much deterred by high valuations which means Charter Hall ((CHC)) and Goodman Group ((GMG)) in the sector are not by definition seen as off limits simply because of premium share price valuations.

Amcor ((AMC)) has also been named for potential disappointment this month because of headwinds and higher input costs (think oil) but now plans to acquire Bemis Company in the US have surfaced, the outlook from here onwards is defined by this US$7bn transaction.

Winners And Losers

Within a broader context, and drawing opinion from all individual sector analysts, stockbroker Morgans thinks an earnings beat and/or outlook upgrade is most likely to come from Suncorp ((SUN)), Insurance Australia Group, Adairs, Wagners Holdings ((WGN)), Acrow Formwork and Construction Services ((ACF)), Smiles Inclusive ((SIL)), Cleanaway Waste Management ((CWY)) and Kina Securities ((KSL)).

Earnings misses and/or a soft outlook is most likely delivered by Coca-Cola Amatil ((CCL)), Costa Group Holdings ((CGC)), Ramsay Health Care, Automotive Holdings, Michael Hill International ((MHJ)), Vocus Group ((VOC)), Nanosonics, Amcor, Monash IVF Group ((MVF)) and Transurban ((TCL)).

Stocks that remain vulnerable because of elevated valuation, in the view of the broker, include Blackmores ((BKL)), Bellamy's ((BAL)), CSL, Domino's Pizza, Infigen Energy ((IFN)), and Aurizon Holdings ((AZJ)).

Analysts at UBS have nominated the following for a potential positive surprise: Alumina ltd ((AWC)), Ansell ((ANN)), BHP ((BHP)), BlueScope Steel ((BSL)), Domino's Pizza (how's this for a contrarian call?), Downer EDI ((DOW)), Flight Centre ((FLT)), Suncorp and Treasury Wine Estates among large cap names.

Among smaller cap peers the selection consists of: Imdex ((IMD)), Ausdrill ((ASL)) and Webjet ((WEB)).

UBS's research indicates the odds are in favour of a negative surprise from: Domain Holdings, Ingham's Group ((ING)), Primary Health Care ((PRY)), and REA Group among large caps, and from Cabcharge ((CAB)), Retail Food Group ((RFG)), Galaxy Resources ((GXY)), Orocobre ((ORE)), and Syrah Resources ((SYR)) among smaller cap names.

Quant analysts at Macquarie have selected Cochlear, Woolworths and AGL Energy ((AGL)) for a potential negative surprise, while BlueScope Steel, Reliance Worldwide ((RWC)), Downer EDI, IDP Education ((IEL)), Beach Energy ((BPT)), Bapcor ((BAP)), and retailer Lovisa Holdings ((LOV)) have been nominated for their upside surprise potential this month.

Analysts at Wilsons have selected the following stocks for what they call "upside reporting season risk": Afterpay Touch ((APT)), Alliance Aviation ((AQZ)), ARQ Group ((ARQ)) -this is the former Melbourne IT- Bravura Solutions ((BVS)), Mastermyne ((MYE)), MYOB ((MYO)), Noni B ((NBL)), NRW Holdings ((NWH)), and ResMed.

Have been nominated because of "downside reporting season risk": Beacon Lighting ((BLX)), Class ((CL1)), Greencross ((GXL)), Nanosonics, and Select Harvests ((SHV)).

As always, no matter what technique has been used, or how many analysts' insights have been involved, or how much time has gone into these selections, there are no guarantees of a high/moderate/above average accuracy rate.

All shall be revealed in the coming three weeks.

Strap yourself in.

Early Beginnings Not AbFab

We are almost halfway through August, but nowhere near half the number of corporate results that are scheduled to be released before the 1st of September. Not sure why Europe and the US can do such a better job in spreading their corporate announcements, but in Australia the concentration always sits heavily in the second part of the month.

It seems even worse this year with the FNArena Corporate Results Monitor only showing 30 company results thus far, and the calendar says it's already August 13th. We are expecting a total tally in excess of 300 by early September, so these numbers give us a good idea of what is yet to be unleashed upon us.

By now, I hope you are all aware FNArena has dedicated a special section on the website for the monitoring of Australian corporate results. We are currently keeping track for August with updates occurring every day:

https://www.fnarena.com/index.php/reporting_season/

The first impression is not that fantastic, unfortunately. Whereas companies in the US know how to be loved and adored, and how to beat market expectations, it always seems Australia is playing to its own rhythm and rules, and they never look as attractive in comparison.

So far we registered five "Beats" (a little over 20%) and ten "Misses". The latter means we registered more misses than "In-Line" corporate results (nine), but it's early days yet, and given so many reports still remain unreported, it would be rather foolish to try to come up with far-reaching conclusions.

On a macro-level, global tensions are likely to remain with us, I believe, and with the ASX200 struggling, if not treading water in between 6200-6300, it seems the catalyst to move higher is not coming from local profit reports. So far, nobody genuinely seems in a selling mood either, so maybe that's the positive take-away.

In terms of stockbroking analysts' responses, FNArena registered seven downgrades in ratings against one solitary upgrade, thanks to Tabcorp ((TAH)), and Monday's weekly update on changes to valuations & price targets and to earnings estimates shows there is a helluva lot of activity taking place on both sides of the ledger – see story on the website.

Maybe stories like the one revealed by Tabcorp can still turn this August reporting season into a positive experience in that market expectations for share market laggards -"value" stocks in funds management parlance- might be too low. Certainly, Suncorp's ((SUN)) release would add more evidence to that, and CommBank ((CBA)) released its weakest set of numbers since the GFC and its share price went up!

But then, what to think of REA Group ((REA)), once again proving investor scepticism was unfounded. The share price has been rallying since the FY18 release, and so it should. REA has been, and still is, one of my favourite companies in the Australian share market, and here is why:

https://www.fnarena.com/index.php/fnarena-talks/2018/03/13/star-stocks-csl-rea/

The share price peaked near $95 in June and subsequently fell all the way to $81, where, as every technician will tell you, the 200 days moving average is situated. Why this share price fall? I believe it was a combination of general angst about the potential impact from a slowing housing market in Australia, plus the usual concern that High PE stocks might be priced for perfection.

Usually, REA Group shares fall after the release of financial numbers so there is an argument to be made such concerns are valid. This year, however, weakness has preceded the release of FY18 numbers and thus the share price added some $6 in quick fashion.

This year, also, we anticipated the peaking and falling in the share price so the FNArena-Vested Equities All-Weather Model Portfolio had reduced its exposure at a higher price and we have been buying extra shares post the results. We don't always manage to turn share market volatility into our advantage, but it's great when a plan works as it was intended to.

Magellan Financial is not of an equally High PE nature, but its experience this month has been similar. First came the sell-off, then the release of FY18 numbers and the subsequent rally. What these observations do is putting one big question mark behind the idea that the share market is always correct and share price action prior to financial results can be relied upon.

That's a big negative, thus. (The February reporting season provided similar evidence).

I also note the share price of James Hardie ((JHX)) put in a big swing upwards prior to results date, only to subsequently dive as the released financial numbers didn't quite meet analysts expectations. Here the belief remains that James Hardie is a high quality business with ongoing strong market fundamentals in the US.

Every single price target put forward by stockbroking analysts monitored by FNArena (see Stock Analysis) remains well above the share price.

We might well be witnessing a clear divergence between short term disappointment and longer term potential. The counter-argument is that James Hardie seems to be building a habit for short term disappointments, and the past two years or so have seen a few.

As per always: the choice is yours.

I see a similar theme behind the punishment that descended upon Orora ((ORA)) last week, as well as for ResMed ((RMD)) where share price weakness has proved of a very limited, short term nature.

One of the important "misses" was delivered by Rio Tinto ((RIO)) early in the season this month. Rio Tinto's result is important because it flags one of the most important issues for Australian companies: rising costs and how best to deal with it.

Investors should heed the warning because I suspect this won't be the last we will hear about it, and so do analysts at Macquarie. On Monday, they zoomed in on local energy companies predicting this running reporting season won't be a smooth experience for investors with many oil&gas companies expected to disappoint, and higher costs will be the main culprit if Macquarie's analysis proves correct.

The analysts consider Woodside Petroleum ((WPL)) the safest best in the sector. They downgraded Beach Energy ((BPT)) in anticipation of a negative surprise yet to be released.

The nastiest profit warning so far has been delivered by EclipX ((ECX)), previously enjoying the share market's benefit of the doubt because its leadership team consists at its core of the team that once upon a time successfully built FlexiGroup ((FXL)). But that was then, now is very much different.

This month's profit warning has seen funds managers like Wilsons dump their stock and the share price was clobbered on the day of the negative admission, despite the share price having been in a sustainable downtrend since November last year. You don't keep telling your shareholders all is running smoothly, and then come out with quite the severe profit warning, effectively admitting you have not been truthful or you don't genuinely have full control and understanding what is going on inside your business.

EclipX is a complex business, and management now has a trust issue. Its reputation has been tarnished. Unfortunately, the stock was part of the FNArena-Vested Equities All-Weather Model Portfolio and we have been selling down our exposure. Risk cuts both ways.

Whereas every commentator and his side-kick always gets hyper-excited about the risk that comes with seemingly expensively priced stocks that miss expectations, I am willing to wager that most investors' pain during reporting season comes from "cheap" looking stocks that simply become a whole lot cheaper.

Compare EclipX with ResMed and Orora, and draw your own conclusions.

Baby Bunting ((BBN)) once again proved sometimes the share market simply requires evidence, even if all the signs and predictions are there. Competitors have gone bankrupt, sold out their inventory, leaving Baby Bunting with short term headwinds, but also with a lot of market share potential beyond these short term headwinds.

The share price had been lingering around $1.40, doing nothing much, and on low volumes. Now we're talking $2.34, and potentially a lot more in the years to come, assuming management can keep the engine humming and no other unforeseen barriers pop up.

The biggest challenge for investors this month is to be able to distinguish short term impact from longer term potential. The macro picture is not getting easier. The Australian economy will remain running at multiple speeds for different sections. We'll have federal elections early in 2019. The RBA will sit on its hands and the housing cycle locally will weigh on consumer sentiment and household budgets.

Most importantly, the disruption and growth stemming from new technologies is not going to disappear.

August Results Thus Far: Quality, Costs And Dividends

By Rudi Filapek-Vandyck, Editor FNArena

One prediction made prior to the August corporate reporting season in Australia has proved to be 100% accurate: volatility has spiked in both directions on the back of corporate performance releases.

Making matters a little more complicated for investors is that share price responses on day one are not necessarily indicative of what follows next. Take JB Hi-Fi ((JBH)), for example. Its FY18 release was first met with share price weakness, but on the second day the shares rallied by 10%+ and they have been creeping higher since.

Shares in GUD Holdings ((GUD)) displayed a similar pattern, though not with the same magnitude. The same observation can be made for Zip Co ((Z1P)), as well as for Navigator Global ((NGI)), for Praemium ((PPS)), for ResMed ((RMD)), for Cochlear ((COH)), for Seek ((SEK)), and for Domino's Pizza ((DMP)).

Works the other way as well. News Corp ((NWS)) results seemed at first well-received, predominantly because of REA Group ((REA)), of course, but they've been falling since. Post result enthusiasm for Suncorp ((SUN)) did not last either. Ditto for Whitehaven Coal ((WHC)).

A second accurate pre-assessment was that cost inflation is starting to bite into companies' operational growth, and it's not just manufacturers and other industrial energy users that are feeling the squeeze; mining companies and energy producers themselves are equally battling to keep cost growth benign.

Heavy disappointments from the likes of Pact Group ((PGH)) and Ansell ((ANN) have thus been accompanied by cost growth disappointments from Rio Tinto ((RIO)), Origin Energy ((ORG)), and Beach Petroleum ((BPT)).

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And still, the earnings season remains relatively young. In terms of market capitalisation, circa 60% of the ASX200 has by now revealed their financial numbers for the six months ending June 30th, but in terms of actual releases we've not even crossed the one-third mark.

FNArena Corporate Results Monitor now contains 93 company results -we anticipate in excess of 300 by early September- and the good news is total "beats" are higher than total "misses" -30 against 26- but I have to add colleague Greg has been somewhat generous in his assessments by including the likes of QBE Insurance ((QBE)) and Hansen Technologies ((HSN)) as a "beat".

Stockbroking analysts are issuing more than twice as many downgrades as upgrades and earnings expectations essentially seem to be going nowhere, with increases on one hand being offset with reductions elsewhere. Maybe the most depressing observation is that, on Morgan Stanley's calculations thus far, only three local sectors have unequivocally enjoyed an increase to average profit growth forecasts; energy, consumer staples and telecom.

Sectors with the heaviest decline are industrials, utilities and discretionary retailers.

Market analysts at Deutsche Bank have tried to emphasise the positive in that forecasts for FY19 and FY20 are only declining by small percentages, as an average. In reality analysts' reductions are enormous, but they are huge in both directions, effectively offsetting each other, sort of.

Another important point made by Deutsche Bank is that commodity prices no longer imply free upside potential from here onwards, while, as we already established, costs are starting to bite for commodity producers as well. One of the key questions this month will thus be whether investor attitude towards miners and energy companies is about to change?

Interestingly, I note that on Deutsche Bank's assessment, the largest falls in profit growth forecasts to date have befallen the Resources sector (also the largest contributor to market growth estimates).

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One surprise thus far this month are companies further lifting their dividends and paying out specials. While this would be well-received by retirees and other shareholders, it can also be interpreted as a gesture from company boards who feel their operational performance is not up to scratch, and it might not get better in the year ahead.

Certainly, Woolworths ((WOW)) tried the good old fashioned higher than expected dividend trick on Monday, but it didn't stop the share price from falling on the weak trading update that accompanied a not too flash FY18 performance. Telstra ((TLS)) did it too. Even CommBank ((CBA)) made a point of increasing its dividend, despite all the operational headwinds, the regulatory scrutiny, and the embarrassment from the Royal Commission.

Both Deutsche Bank and Morgan Stanley make the observation local dividends have been the key surprise thus far this season. As such, Australian dividends are rising in line with the global trend, with research conducted by Janus Henderson suggesting dividend payouts globally have surged to a new all-time high this year.

The key difference is, alas, that dividends internationally are growing strongly as a result of noticeable increases in profitability and in cash flows, while locally dividends are increasing further, from already elevated levels of payout, as a defensive measure; to please shareholders in the absence of strong growth.

On Janus Henderson's numbers, global dividends jumped 12.9% year-on-year in the second quarter to $497.4bn, with new records set in twelve countries, including Japan and the USA. The Janus Henderson Global Dividend Index ended the quarter at a new record 182.0, meaning global dividends have risen by more than four-fifths since 2009.

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One prediction that has quickly turned into a misguided ghost story, is that richly valued companies were set up for a fall-off-the-cliff experience. It did not work out that way in February, and neither is it happening in August. From GUD Holdings ((GUD)), to REA Group, to CSL ((CSL)), ResMed ((RMD)) and Cochlear ((COH)), plus a whole bunch of others, if anything investors are incredibly quick to start buying in case some weakness does occur.

The reason, I believe, remains that these companies are in much better shape than most of the so-called "value" laggards, with better growth prospects, less operational and regulatory risks, and with much better adaptation to modern day disruption from the internet and other factors.

I have written about this before, but I also sense there remains a large wall of disbelief and of resistance against this observation. It's easy for me to add that those investors who are still refusing to accept this, have unlikely done themselves, and their portfolios, any favours over the past 5-7 years.

The latest example of this comes from Goodman Group ((GMG)), high quality achiever inside the global property development sector, with leverage to modern technology through the planning and construction of large warehouses and distribution centres. Prior to the release of FY18 financial performance numbers, analysts pointed out the shares did not look cheap.

This has not stopped the share price from rallying higher following the release of a result that met already elevated expectations, supplemented with enough evidence operational momentum remains strong, with risk to the upside. Analysts' forecasts have risen post the release, pushing up the consensus price target, but the share price remains at a sizable premium.

So what is an investor to do?

My suggestion is the same as with the High Quality Achievers I keep on pointing out, time and again: you wait for share price weakness, which you use to climb on board. This is a time and context that reward quality and investors will not be able to purchase these shares at a comfortable discount. The alternative is to buy cheaper looking stocks, that thus have a problem, or simply are of lesser quality, and carry more risk.

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One pleasing observation is the 3.17% average increase in consensus price targets for companies having reported to date. Certainly, were this number to remain unchanged over the coming eleven days, that would make August a "great" reporting season according to this specific measure. But with more than 200+ companies yet to report, it's probably better to refrain from any heavy handed forecasts.

The Australian share market has continued its positive performance in July and thus far in August it has added 1.3%. I would not ascribe most of this performance to the local reporting season. Instead, I continue to believe Australia remains a key beneficiary from global macro-developments, with Emerging Markets experiencing net outflows and some of those funds finding their way into Australian equities instead.

There is, however, no room for complacency and investors are better off watching their risk tolerance and their exposure to potential risk of disappointing market updates, as shown daily through heavy share price falls in case reported financials do not meet market expectations.

The local reporting season continues until early September, after which a number of out-of-cycle companies starts releasing their financial updates, but in a more measured manner.

Investors who are as yet not familiar with FNArena's Corporate Results Monitor can catch up with the latest updates here:

https://www.fnarena.com/index.php/reporting_season/

August Results Thus Far: Less 'Misses' Are A Positive

In an ideal world, the Australian share market would be isolated from global macro-economic and geopolitical dynamics, so that share price movements in August can be more reflective of corporate results and how they compare to share price valuations and market forecasts.

In the real world, of course, no such separation can be established. And besides, this year the slew of exogenous influences includes political shenanigans in Canberra, from which it remains impossible to separate either way (though many among us would take that option, no doubt about that).

And so it was that after three busy weeks of assessing and weighing up in excess of 230 corporate results, the ASX200 Accumulation Index has gained the grand total of 0.09% for the month. Luckily, July had been a positive month. The Jackson Hole speech by Fed chair Jerome Powell percieved as "dovish" might assist the local market in adding some additional upward momentum into the final week of the month.

It is not possible to estimate where the index would be without Coalition government infighting, but what we can establish is that the overall picture for the running reporting season made a leap for the better in its third week. On current numbers, more than 30% of released results did better than expected while less than 23% disappointed either on financial performance, or on forward guidance, or both.

In particular that latter percentage means this could become one of the better reporting seasons simply as a result of less corporate disappointments. As a comparison: in February we measured 37% of all results as better-than-expected -the equal highest in the five year history of FNArena's Corporate Results Monitor- with 25% below expectations.

The lowest number of disappointments in a  reporting season was established in the very first season we covered: 19% in August 2013.

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We probably still have circa 80 results to add to the current tally, but in terms of market capitalisation reported company results by now represent some 95% of the Australian share market. Only Ramsay Health Care ((RHC)), Boral ((BLD)) and Caltex Australia ((CYX)) have yet to report among the larger cap household names, to which I no longer include a bricks and mortar retailer such as Harvey Norman ((HVN)).

Among the negatives that are unlikely to change in the week ahead: earnings forecasts are under pressure, in a broad sense, with estimates for FY19 suffering the largest pullback since the start of the calendar year. The good news is, this month's pullback in forecasts remains a lot smaller than the reductions that were occurring prior to and during last year's August reporting season.

We are talking less than -1% versus in excess of -1% in August last year and -3%+ in both February 2016 and August 2015.

With only Macquarie Group yet to report among ASX20 constituents (Macquarie reports out-of-season), it once again has become evident most of the seasonal excitement lives outside the so-called Blue Chip stocks in Australia. With exception of Wesfarmers ((WES)) and of CSL ((CSL)), most of the positives from the local Top20 tends to arrive in the form of "not as bad as feared" or "could have been a lot worse".

Think QBE Insurance ((QBE)), and Telstra ((TLS)), and Suncorp ((SUN)).

Another method to deliver positively is by announcing restructuring, cutting costs, and spinning off non-core operations. That's what Brambles ((BXB)) did. Amcor ((AMC)) announced a large acquisition in the US.

Yet again the Top20 proved not to be the safe haven investors once upon a time might have perceived it to be with Origin Energy ((ORG)) and Insurance Australia Group ((IAG)) widely mentioned as among the weaker stand-outs for the present reporting season. Both share prices have fallen noticeably, which is hardly a coincidence.

CommBank ((CBA)) reported its weakest financial performance since the GFC, and that was before Westpac's ((WBC)) quarterly trading update shocked with a noticeably lower Net Interest Margin (NIM). Rio Tinto's ((RIO)) share price equally went down by double digit percentage following a disappointing interim result, but here the falls were exaggerated on the back of a general pullback in commodities prices and stocks.

Rising costs are back as the bogeyman for Australian corporate managers and Rio Tinto's early signalling has since been swiftly followed up by the likes of Adelaide Brighton ((ABC)), Ale Property Group ((LEP)), Ansell ((ANN)), Huon Aquaculture ((HUO)), Northern Star ((NSR)), Pact Group ((PGH)) and St Barbara ((SBM)), among many others.

A number of company boards tried to placate otherwise disgruntled shareholders with additional dividends and other forms of capital management. Indeed, many surprises this month again arrived in the form of higher-than-forecast dividends, which should at the same time trigger questions from investors. What are companies trying to hide?

Perpetual fund manager Anthony Aboud has already gone on record in warning investors on his observation companies are increasingly using trickery and aggressive accounting to make sure they meet market expectations. A relatively low number of "misses" for the season thus far can be seen as potentially supporting Aboud's under-the-bonnet analysis. Domino's Pizza ((DMP)) is among companies being accused by some of obfuscating the true picture inside the fast food empire, while FY17 numbers were restated at Corporate Travel ((CTD)) for reasons not clear to everyone.

On Monday, analysts at CLSA downgraded MYOB ((MYO)) to Sell with a price target of $3.12 for similar reasons. CLSA suggests the quality of the financial results reported looks "suspect", with the company being accused of having under-invested for too long, and with management still reluctant to admit it will have to spend a lot more in the years ahead, or else lose the war with heavy spending rival Xero ((XRO)).

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Tim Baker and David Jennings, equity market strategists at Deutsche Bank, summed the present reporting season up as follows:

1. Earnings results are largely in-line, which is seen as broadly positive. One niggling negative here is that Deutsche Bank up until Friday had upgraded FY19 earnings estimates for only 37% of companies, well below the historic average of 45%.

2. Dividend payout ratios have once again surprised (better than expectations).

3. Industrials companies have reported higher-than-forecast margins. One niggling negative here is very few surprised with their top line growth, suggesting to Baker and Jennings low quality items have made up the difference.

4. Earnings growth on average remains "decent". On Deutsche Bank's numbers, growth for the six months to June 30 is about 7%.

5. Industrials companies are still seeing solid growth, in particular offshore earners and resources related companies.

6. High PE names are simply refusing to de-rate, even as some companies slightly disappointed, guided towards slower growth, or announced increased spending.

Market strategists at UBS highlighted slightly different angles, noting forward guidance, if and when provided, is where most of this month's disappointments showed up. At UBS, negative EPS earnings revisions for FY19 outnumber positive revisions by two-to-one.

Upside surprises came mostly in the form of better cash flows and higher dividends, with UBS pointing at resources stocks in particular.

Other points highlighted by UBS:

1. Market still not afraid to pay up for high PE stocks, and quite forgiving in case of "misses" by premium stocks

2. General insurers reported robust pricing increases

3. There are signs of a modest recovery in mining exploration

4. Mining services providers and contractors are benefiting from East Coast infrastructure spending

5. Lower electricity prices have triggered downgrades for generator retailers

6. Higher quality offshore earners are generally performing better than domestically oriented companies, particularly in the healthcare sector

On UBS's assessment, the most positive reports from large cap stocks in the first three weeks were released by Cimic Group ((CIM)), Magellan Financial ((MFG)), QBE Insurance, and a2 Milk ((A2M)). The most disappointing releases are believed to be those from Challenger ((CGF)), Iluka Resources ((ILU)), Ansell, and Insurance Australia Group.

****

As per standard practice, each reporting season sees companies being punished for badly missing market forecasts. On Monday, as I write this Weekly Insights update, shares in telecom minnow Netcomm Wireless ((NTC)) are down in excess of -38% post the release of FY18 financials.

Elsewhere, childcare centres operator G8 Education ((GEM)) has continued the bad news cycle with a weaker than expected FY19 guidance and its shares are down -15%. On my observation, stocks like G8 Education tend to attract investor attention because of their high implied dividend yield which tends to give the wrong impression that downside potential is limited and thus buying the shares a low risk strategy.

Another example is Automotive Holdings ((AHG)) which, earlier in the year, saw its share price fall from $3.40 to below $3, after which the interest of many a yield seeking investor was piqued. This month's financial results could not prevent analysts from reducing forecasts further, and the result is now a share price of $2.34.

Investors might be enjoying better-than-expected dividends at the top end of the market, where companies meet and beat expectations, in the nasty corner, where cash is under pressure and management teams cannot instill a recovery quickly enough, there is always plenty of pain for investors hoodwinked by numbers from the past or simply because they don't want to own a previous error and decide hoping for the best is not such a bad strategy.

This is as good as anytime to once again highlight the fact that analysts forecasts remain subject to changes under the best of circumstances; they will change in case of better and worse developments, which then has a follow-on impact on valuations and thus the share price.

Following the recent rallies in telecom stocks, banks are now the highest yielding sector in the Australian share market, and quite by a margin. Average yield for banks stands at 6.3% versus 5.9% for Financials, 5.7% for telcos and 5.4% for utilities with AREITS currently offering on average 5.1%.

Next week: the final review of the August reporting season.

August 2018 Reporting Season: The Final Verdict

The August reporting season always provides investors with fresh insights and updates that can be used as input for portfolio adjustments and strategy re-alignment for the year(s) ahead.

Last month has been no exception (definitely not!), but before we get to the nitty gritty of the most recent mass-update on how corporate Australia is faring, let's zoom in on the statistical data first.

As things stand now that the August reporting season is officially over, and we have to assume the bulk of broker reviews and responses are in the public domain, 307 companies in the FNArena universe have reported with 145 (47%) of these companies doing so broadly in-line with guidance and expectations, leaving 87 (28%) to do better and 75 (24%) to disappoint.

Put in a broader perspective, these numbers suggest the overall context for Australian companies has become tougher since February when 37% of companies did better than expectations and 25% disappointed. One obvious conclusion to draw is there has been a noticeable switch to in-line reporting.

That conclusion still stands if we compare with the data gathered from all prior seasons going back to August 2013. In particular the fact that only 28% managed to outperform market expectations while 30% or higher seems the norm, underpins the suggestion it is not easy out there in the real economy.

The 24% in "misses" sits right in the middle of historic comparables, on par with August and February 2016, but also better than each of the reporting seasons since. So less misses and less upside surprises; does this make for a middle-of-the-road reporting season, unspectacular but decent?

Probably yes. Earnings estimates have fallen, as they do most seasons, but Australian companies ex-resources are still expected to continue growing at circa 7%, on average, which is not bad at all compared to the years past. Banks continue to be laggards, while Resources continue to reap the benefits from expansion restraint and higher-for-longer product prices.

Valuations, in general, remain far from cheap, but they have been around present levels for quite a while now. The average Price-Earnings (PE) ratio for the ASX200 is around 15.7x, but this masks the fact many companies with robust growth under the bonnet trade on much higher multiples, and have been for a number of years now.

When we take this into consideration, the number of spectacular misses and subsequent capital punishments has quite arguably remained relatively benign, and August 2018 was not an exception in this department. Yet evidence suggests there is more at work behind historically high PE multiples for selected growth stocks than simply investor exuberance or momentum traders' delight, as some value investors would like us to believe.

Stockbroking analysts issued 83 recommendation downgrades throughout the month (only counting those in relationship to financial results) and 45 upgrades. Back in February, the balance was in favour of more upgrades -88 versus 53- but that is rather the exception. What stands out is the circa 3.46% average increase for consensus price targets throughout the month.

History shows February is usually the season when price targets jump most and when they do, August tends to see much lower increases. Not in 2018. February saw an average increase of 4.3%. Combined with August's 3.46% makes for the highest annual increase since FNArena started keeping records in August 2013.

Most of the increases in February and August this year can be attributed to the high growth, high PE stocks that have kept on performing this year. Think CSL ((CSL)) and REA Group ((REA)), but also Afterpay Touch ((APT)) and WiseTech Global ((WTC)).

In terms of share market performance, the ASX200 Accumulation Index (including paid out dividends) added 1.42% on top of a positive performance in July for a combined gain of 2.83%. For the first eight months of the calendar year total performance has now risen to 7.23%. Again, considering most equity markets outside the US are barely in positive territory or deep into the negative, this does not look like a bad achievement.

One has to acknowledge though, the Australian share market remains one key beneficiary from funds flowing out of emerging markets and this, more than local corporate results, has underpinned share market momentum thus far.

The FNArena/Vested Equities All-Weather Model Portfolio experienced yet again a positive reporting season gaining 3.27% for the month of August, 4.14% for the two opening months of financial 2019 combined and 11.28% calendar-year-to-date. I shall update more in detail about the Model Portfolio later in September.

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In my view, the best way to judge how companies are performing is through measuring the impact of their financial report on analysts views and forecasts. And the best measurement of such impact is via consensus price targets.

Which is why these targets are front and centre of FNArena's reviews of corporate results via the dedicated section on the website:

https://www.fnarena.com/index.php/reporting_season/

Looking at the share market (or one's investment portfolio) from this angle can trigger a number of fresh insights.

The price target for Commbank ((CBA)), for example, has increased to $73.94 from $73.63 prior to its FY18 release. That's an increase of 0.42%. Given the share price at the time of the release was actually higher, it shouldn't surprise CommBank shares have since been sliding lower (they paid out one final dividend too).

Put in a broader sector perspective, at least the target is no longer falling, even though it might be too early to make robust predictions about the worst of sector challenges now being behind us. It equally serves as yet more evidence for investors the golden years for Australian banks when each reporting season would add several percentages on top of existing targets are not about to resume anytime soon.

On the other hand, price targets for first mover lay-by facilitator Afterpay Touch ((APT)) jumped by an average of nearly 69% to $22.33 post the release of FY18 financials and the announced expansion into the UK. This is also where the stock settled at first, before investors taking profits pushed it lower.

And if we really want to know how bad the latest profit warning by iSentia ((ISD)) actually was, let's consider the price target has fallen to 44c from $1.01; and that's not taking into account this is a stock that has traded as high as $4.85 since it IPO-ed in June 2014, with valuations and price targets sliding ever lower as more bad news and disappointments have accumulated.

G8 Education's ((GEM)) price target has now sunk to $2.36 from $3.03 (-22%). Interestingly, the target for a2 Milk also retreated a little: to $11.50 from $11.72. Telstra's ((TLS)) average target, in contrast to the strong rally in the share price, has now fallen a further -6.5% to $2.95.

And if anyone wonders how disappointing the market update by Origin Energy ((ORG)) really was, its price target has since lost more than -6.5% to $9.54.

****

Back in February, the big surprise to most commentators was how high growth, high PE stocks continued to deliver, and in many cases managed to still outperform high expectations. The result was for an unusually wild reporting season with many high-flying high PE growth stocks rallying strongly upon the release of financial numbers.

The fact that many share prices had been pared back in anticipation of what surely had to be the (long anticipated) day of reckoning for stocks including Altium ((ALU)), WiseTech Global and Corporate Travel Management ((CTD)) helped creating an environment of wild swinging share prices; mostly to the upside.

August has been no exception, but this time the wild swings have been less about high PE stocks still living up to their promise, though the same core feature still applied -think CSL ((CSL)), Afterpay Touch, and others- but equally so about companies that had been under intense pressure for a prolonged time, finally delivering positive news, even if this was because there was an absence of bad surprises.

And thus this time long suffering shareholders in FlexiGroup ((FXL)), QBE Insurance ((QBE)) and, yes, even Telstra got their fair share of the wild up-swings that have occurred during August. It was not all related to corporate results with TPG Telecom ((TPM)) announcing a tie-up with Vodafone Hutchison Australia and numerous acquisitions being declared, including by Northern Star Resources ((NST)), Pact Group ((PGH)), Amcor ((AMC)), Orora ((ORA)), and others.

The mentioning of the three packaging companies is no coincidence. Packaging has been a highly rewarding sector for share market investors in Australia over many years, but not so over the past twelve months. Smaller players Pact Group and Pro-Pack Packaging ((PPG)) have been among the most prominent disappointers in August with rising costs on the back of sharply higher energy prices creating a much tougher operational dynamic.

The fact the three largest companies in the sector locally have each announced one additional corporate acquisition in August should be seen against this background.

The same dynamic has started to unfold among the so-called value stocks; companies that have been under immense pressure as they were badly prepared for new technologies and changes in the competitive landscape that impacted on their market positioning and business model. This is why TPG and Vodafone Australia found common ground. This is also why Harvey Norman ((HVN)) has decided to raise $163.8m and is preparing for expansion into new geographies.

The corporate universe, and by extension the share market, is never a static proposition. The losers of the post GFC era are starting to respond, and the August reporting season has delivered plenty of examples of company boards seeking a turnaround in fortune. Other examples are the proposed "merger" between Nine Entertainment ((NEC)) and Fairfax Media ((FXJ)) and the decision to consider selling non-core assets by Coca-Cola Amatil ((CCL)).

While many of such initiatives tend to be well-received in the share market short term, investors are likely to remain sceptical about longer term viability and sustainability created by these corporate initiatives. Watch, for example, how the share price rallies in laggards such as Nine Entertainment, FlexiGroup and Telstra have had no impact on share prices of robust growing companies such as CSL, ResMed ((RMD)), Cochlear ((COH)), and others.

A similar general scepticism remains on display towards miners and energy companies. Investors are happily receiving additional benefits through surplus cash flows and capital management, but share prices remain cheap relative to most other sectors in the share market. Cost inflation proved one of the key problems for many a resources company in August.

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Companies that have caught my attention during the month, include:

-Baby Bunting ((BBN)); the competitive landscape is literally disappearing, but the share market still wanted concrete evidence. The share price has now settled at a much higher level than pre-FY18 results. With analysts suggesting this could be the early beginnings of a multi-year upgrade cycle, this looks like one stock to keep a close eye on.

-Bravura Solutions ((BVS)); this service provider to the financial sector has proved to be a genuine winner since IPO-ing again in late 2016, after a period of private equity ownership. We only have Macquarie in the FNArena universe to cover the stock, but over at Wilsons the analysts are even more enthusiastic labeling the FY18 report released in August a "stand-out in the context of our coverage universe". No surprise here, Bravura remains firmly on the Wilsons Conviction List.

– Citadel Group ((CGF)); Software-as-a-service (SaaS) provider to governments, healthcare sector and tertiary education with security contracts for Defence and national security on top. Continues to win new contracts and has never come out with a big negative announcement a la Integrated Research or Hansen Technologies. Double digit growth looks secured for the years (multiple) ahead and all three of Shaw and Partners, Bell Potter and Wilsons seem convinced the risk remains to the upside.

-Freedom Foods Group ((FNP)); nobody would call this stock "cheap" trading on a forward PE multiple in excess of 50x, but then past investments are paying off through higher margins and accelerating profit growth with Citi analysts predicting earnings per share can potentially more than double over the next two years. No guessing as to why the analysts think this is one of the most exciting stocks under their coverage in Australia.

-Goodman Group ((GMG)); the All-Weather Model Portfolio was forced to sell its share in Goodman Group in mid-2016 as it became apparent fellow investors were not going to take any prisoners and sell down everything with even a hint of bond market correlation. Sadly, we never revisited the investment case while the shares were beaten down, and we have been regretting it every day since. Regrets, we all have a few. This is such a strong management team, operating one of the most robust and high quality growth companies in the local property/bond proxies segment. August saw management upping guidance for the years ahead. Consider this one Royalty with leverage to online retail sales.

-Wesfarmers ((WES)); Hope springs eternally and we only have to look at the Wesfarmers share price since April this year to witness that statement in live view. But Wesfarmers probably delivered one of the stand-out financial performances among large cap companies in Australia, which is why broker price targets made a decisive jump higher, but also why the share price remains at a sizable premium. Bunnings is slowing though and Coles will soon operate under its own stand-alone management (with too high a dividend burden). What is the future going to look like? Seldom has this question been as fitting as for the conglomerate from West Australia. I doubt anyone knows the answer.

All of the above in addition to the stocks included in the All-Weather Model Portfolio, of course, as well as those listed on the dedicated page of the FNArena website (exclusively available to paying subscribers, 6 and 12 months). I believe one of the stand-out characteristics of the August reporting season is how investors have continued to show their preference for robust growth stories (like CSL) and their willingness to forgive small misses and minor negatives, such as has been the case for ResMed, Cochlear, and others.

August Reporting Season: The Final Snippets

The past five weeks I have previewed, assessed and analysed mid-year financial results released by corporate Australia. As part of my job as Editor, I also pay attention to what other experts might find and/or conclude (even though I may not necessarily agree with it).

Below are the final snippets from post-August reporting season analyses published by stockbroking analysts over the week past. Hopefully they add further useful insights to my writings from the past five weeks.

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One of the sectors that surprised in August were the retailers. Despite the many headwinds, threats and doubts, many retailers posted better-than-expected financial results and were rewarded with rising share prices, note analysts at Citi.

However, under the bonnet not everything is necessarily as positive as one might conclude on the basis of these positive share price responses.

Citi analysts have observed how the cost of doing business (CODB) is rising across the sector, and they expect this to be a multi-year trend as retailers are shifting more volumes online and this new trend has arguably only just started.

The shift goes hand-in-hand with additional investments, hence why CODB is pushing up costs, and offsetting much of the achieved increases in sales. Citi thinks it's best to remain cautious, with the analysts predicting sales momentum looks poised to slow while the risk of discounting is ever present.

For the sector as a whole, the analysts observe Citi has presently more Sell ratings than Buys.The next potential catalyst on the horizon is the trading updates to be communicated at AGMs in October and November.

In a separate report released prior, Citi retail analysts updated their ranking order for smaller cap retailers on the ASX. Most preferred is footwear expert Accent Group ((AX1)), which has now pushed cheap bling expansionista Lovisa ((LOV)) to the number two spot, followed by (in order of preference) Baby Bunting ((BBN)), Super Retail ((SUL)), Specialty Fashion Group ((SFH)), Beacon Lighting ((BLX)), Premier Investments ((PMV)), Nick Scali ((NCK)), Greencross ((GXL)), Michael Hill ((MHJ)) and, lastly, Myer ((MYR)).

It seems that, whenever there is a ranking to be had, and Myer is involved, it is but a certainty who ranks last.

####

Retail specialists at UBS pretty much hold the same view. They have, on balance, reduced more estimates and talk about "better than feared" financial performances in most cases, while retaining an overall cautious sector approach.

Stand-out opportunities, in UBS's view, are represented by Flight Centre ((FLT)) for which the broker sees ongoing upside risks, and Costa Group ((CGC)) and Metcash ((MTS)) as market momentum for food is on the up. UBS also believes Coca-Cola Amatil ((CCL)) remains a Sell/Short.

Key Buy ideas from the team at UBS include Metcash, Treasury Wine Estates ((TWE)) and Flight Centre while the three key Sell calls are Coca-Cola Amatil, Ingham's Group ((ING)) and, of course, Myer.

####

An interesting note on the sector was published by Morgan Stanley with the analysts pointing at the ever broadening trend across consumer-oriented companies to include one-off items in their financial results.

This, of course, raises questions about quality of reporting and health of underlying operations, as well as how one-off are such items if they are becoming a frequent feature?

Morgan Stanley covers 16 consumer stocks in Australia, and only two -Woolworths ((WOW)) and JB Hi-Fi ((JBH))- did not include one-off items in August, report the analysts. They'd prefer companies with a cleaner sheet, but also admit investors thus far seem comfortable wth this broadening sector phenomenon.

Collectively, report the analysts, the 16 consumer stocks (effectively 14) reported a total of $2bn in one-off charges, equal to 25% of their combined normalised profits in FY18.

An equally noteworthy observation comes from analysts at Credit Suisse who point to a trend towards increasingly aggressive accounting by retailers as the pressure remains on bricks and mortar stores.

With the use of data and e-commerce on the rise across the sector, CS analysts anticipate software expenditure is likely to be an increasing feature of retailer reporting. The analysts note both Domino's Pizza ((DMP)) and Super Retail ((SUL)) already have tended to capitalise a large amount of software development expenditure relative to profit in recent years

Credit Suisse predicts bricks and mortar will continue to be under pressure, so watch this space.

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Market strategists at Morgan Stanley observe how quickly Australian equities have traded in their regional outperformance starting in June for above average losses into September.

Morgan Stanley remains cautious towards banks and housing related exposures, but the analysts also note High PE names have fallen harder leading to relative outperformance for value-oriented strategies during the post-August share market sell-down.

However, the strategists remain of the view that investors hoping for a repeat of the late 2016 portfolio rotation whereby money kept flowing out of healthcare, technology
and other growth stocks in favour of financials and resources shall be truly disappointed.

Such a repeat is simply not on the cards, predict the strategists.

If there is to be any noticeable portfolio rotation, it will have a more defensive character, in the strategists' view. They point at desynchronising global momentum and intensifying emerging markets stress to support their assessment/prediction.

In an earlier report, Morgan Stanley strategists had expressed their view that valuations seemed high in Australia when compared to what companies actually managed to deliver in August. This concern of valuation was by no means limited to healthcare or High PE growth stocks.

Morgan Stanley found little upside left with the ASX200 above 6300 in late August.

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Ord Minnett, which is simply copying the views and conclusions communicated by JP Morgan, is worried about a general de-rating for High PE stocks in Australia. This because share prices for stocks like Afterpay Touch ((APT)), Kogan ((KGN)) and WiseTech Global ((WTC)) have kept on rising during reporting season, and this does not appear to be fully supported by the financial results released.

Other stand-out characteristics are believed to be rising costs and increased capital expenditure forecasts. Ord Minnett/JP Morgan remains of the view that earnings estimates remain too high and will have to re-set at some point in the year ahead.

####

Hasan Tevfik, formerly at Credit Suisse but nowadays strategist at MST Marquee, retains a positive outlook for the local share market. When everything is said and done, Tevfik notes the average EPS growth for the ASX200 is 7.5% for the year ahead, which he sees as "reasonable".

This also implies share market return should be reasonable and positive, is his underlying thesis.

Tevfik has spotted many signals that point towards late cycle development, but this should not necessarily be taken as a bad omen. Late Cycle, says Tevfik, doesn't mean the next bear market or recession is about to announce itself.

This late cycle stage can still last for a couple of years longer. No need to get overly worried just yet.

On his assessment, the stand-out sector in August was mining & steel. It was the only sector that enjoyed net upgrades to earnings forecasts.

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Stockbroker Morgans, on the other hand, has a different view. If forecasts for circa 7% growth fail to accelerate, Morgans thinks the share market is likely to feel gravity kicking in.

The stockbroker is in particular worried about High PE growth stocks that seem priced for perfection and thus might not be able to escape profit taking.

Morgans has been encouraged by Australia's blue chip large caps that might not have managed to outperform expectations in August, but their results in a general sense were "robust" and this is seen as a positive.

Another observation worth pointing out is that investors welcomed in-line results from share market laggards & value stocks. Value is not dead after all, concludes the broker, while adding it was a rather unpleasant reporting season for short sellers.

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Elsewhere, healthcare specialists at Citi note the August reporting season has largely delivered what had been anticipated with offshore earners significantly outperforming peers with a domestic focus.

Citi analysts remain a big fan of the three sector leaders -CSL, Cochlear ((COH)) and ResMed ((RMD))- and the only thing that keeps the Buy ratings away are elevated share prices. Having said this, the analysts did increase price targets for all three. CSL's target has moved to $238 from $232, Cochlear's lifted to $220 from $198 and ResMed's new target is $15.50, up 50c from the prior one.

The fresh sector update also comes with a few changes in ratings. CSL has been downgraded to Hold from Buy. Ansell ((ANN) has been upgraded to Buy from Hold. Same for Primary Healthcare ((PRY)).

Fisher & Paykel Healthcare ((FPH)) is now the only Sell rated stock in the sector. Sigma Healthcare ((SIG)) continues to be rated Hold, but with the added High Risk. Ramsay Health Care ((RHC)) continues to be rated Buy with a price target of $62.

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Healthcare analysts at Credit Suisse have nominated CSL and Mayne Pharma ((MYX)) as their two favourite healthcare stocks post August. Least preferred are Ramsay Health Care, Primary Healthcare, Sonic Healthcare ((SHL)) and Ansell.

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Macquarie observes overall operational dynamics for mining engineers and contractors continues to improve, with the added observation that top line growth has announced itself but with pressure on margins, indicating competition is fierce and cost inflation real.

Macquarie's sector favourite is Downer EDI ((DOW)), followed by Cimic ((CIM)), WorleyParsons ((WOR)) and Monadelphous ((MND)).

On the basis of historic precedents, Macquarie analysts are still willing to bet on margin increases over the next 2-3 years as overall activity for the sector is expected to improve.

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