August 2019 Verdict: Strength From The Few

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 | Sep 05 2019

Dear time-poor reader: Some stats and reflections on a corporate reporting season that might have been the worst in a long time.

In this week's Weekly Insights:

-August 2019 Verdict: Strength From The Few
-Rudi Talks

-Rudi On Tour

August 2019 Verdict: Strength From The Few

By Rudi Filapek-Vandyck, Editor FNArena

On the micro-level, a failed or splendid financial performance release can have a noticeable impact on a company's share price up to three months down the track.

On the macro-level, recent observations suggest beats and misses can set new trends for sectors and broad themes, or keep the momentum going for longer.

With the August reporting season revealing more weakness, and most performance disappointments, from laggards and cheaply priced companies, the obvious conclusion might be it remains way too early to predict the downfall of highly priced, rapidly growing performers.

Patient investors in lagging building materials companies, retail landlords, listed professional value investors and small cap financials might have to be patient for longer.

If I restrict my memory to the past two years, investors turned cautious and sceptical ahead of the February reporting season in 2018, but were subsequently blown away by results released by Appen, Altium, WiseTech Global, CSL, ResMed and most other highly popular, High PE growth stocks which then re-launched the momentum for Growth in the share market until the following August, when the scenario pretty much repeated itself.

We recall that CSL shares rallied no less than 15% after updating its financials that month, which only broadly met expectations at the time.

Then followed a nasty and volatile downturn. By February this year, the previously virtually untouchables, including ResMed, CSL, etc, started releasing financial reports that either missed expectations or proved merely OK. This then, of course, begged the question: has the time finally arrived for cheaper priced "value" stocks to have their moment under the sun?

It turns out, that swing in momentum hardly made it into August. Even miners and energy companies merely showed their weaknesses throughout last month, disappointing on multiple levels except when larger dividends and share buybacks had been announced, which in itself poses a few questions regarding operational performances against cost controls and boards inclined to offer compensation.

General weakness in commodity prices exacerbated the weakness in share prices. Right at the cut-off of reporting season, nickel popped up as the against-the-general-trend exception, alongside gold.

As things turned out, corporate Australia is in a vulnerable state with plenty of sectors battling multiple headwinds. Against this background, good old bricks and mortar retailers delivered the stand-out, positive surprise in August. Their performance was matched by the High Quality names of CSL, ResMed, REA Group, Altium, WiseTech Global, Goodman Group, Charter Hall, and numerous others.

But nothing can mask the cold hard impartial observation that August 2019 marks the weakest reporting season since August 2013, when FNArena started keeping detailed records and stats. We didn't know it at that time, but August 2013 was a pretty weak reporting season. August this year has, for the very first time since we keep records, generated more "misses" than "beats" in the corporate results releases.

If we combine the recent reports with the fact that both preceding reporting seasons in 2019 (February and March-July) only saw total "beats" equalling "misses" on each occasion, one can only conclude things are incredibly tough and challenging for large parts of the Australian economy. Judging by the latest update, the broad trend is not improving either.

We can all but wonder what exactly the impact could have been on the local share market if the general background was not made up of central banks loosening policies, including the RBA, and a global investment community thirsty for yield. A weakening Aussie dollar will be keeping hopes alive that more of the benefits will start showing up in the six months ahead.

August Report Card

Few will criticise or deny, some of the strongest performances in August were released by CSL ((CSL)), WiseTech Global ((WTC)), AP Eagers ((APE)), Infomedia ((IFM)), IPH ltd ((IPH)), James Hardie ((JHX)), Magellan Financial ((MFG)), Medibank Private ((MPL)), Pro Medicus ((PME)), and ResMed ((RMD)).

Special Note: none of these companies fall into the category of cheaply valued stocks.

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