Rudi’s View: Early Signals From August 2020

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 | Aug 20 2020

Dear time-conscious investor: early signals from reporting season are positive, but it's early days, while institutional investors still like technology stocks, with analysts lining up their favourites

In this week’s Weekly Insights:

-Early Signals From August 2020
-Small Cap Favourites
-Technology Remains Everybody’s Favourite
-Investment Opportunity For Sophisticated Investors

Early Signals From August 2020

By Rudi Filapek-Vandyck, Editor FNArena

At first glance, this year’s August reporting season is providing support to the strong share market recovery witnessed since April, decisively delivering more “beats” than “misses” in corporate results and with stockbroking analysts increasing their price targets on average by 4.79%.

As per always, broader context is necessary to put the first two weeks of August in a proper framework.

The most important factor to consider is that the FNArena Corporate Results Monitor as at the 17th August still only includes 55 ASX-listed companies with subsequent broker responses.

While the Monitor operates on a 24-hour delay, the time needed for analysts to respond and reassess, properly, 55 companies to date is well below prior reporting seasons this far into the month.

Hence, it’s dangerous to draw firm conclusions from such a small batch of reports, involving no more than 15 members of the ASX50 and 35 of the ASX200, but it cannot be denied early indications are relatively positive and investors are showing a willingness to look through short-term headwinds, as I anticipated.

We will all be a lot wiser by this time next week, but as early indications go this season is heading for:

-circa -20% fall in earnings per share
-circa -38% reduction in dividends, with payout ratios on the rise (again)
-mild growth forecasts for FY21 (meaning growth won’t return until FY22 for many)
-on balance, net increases to valuations & price targets
-roughly balanced moves between upgrades and downgrades in stockbroker recommendations
-ongoing uncertainty with most companies refraining from providing FY21 guidance

Dividend Surprises

The biggest positive stand-out has come through numerous upside surprises for shareholder dividends, including from AGL Energy ((AGL)) whose dim outlook surprised many, but the AGL board decided the company shall payout 100% of profits over the next two years.

The AGL example serves as an early guide as to how Australian boards (still) feel compelled to use just about anything at their disposal in order to meet the income requirements from a large group of domestic shareholders.

Apart from AGL, more dividend surprises have come from AMP ((AMP)), Aurizon Holdings ((AZJ)), Evolution Mining ((EVN)), GPT Group ((GPT)), Newcrest Mining ((NCM)), and QBE Insurance ((QBE)) while CommBank’s ((CBA)) 98c H2 payout was more than many analysts had penciled in.

Of course, as the above summary indicates, many more companies will not be paying any dividends this year, or next year, but many others won’t be holding back, effectively creating yet another demarcation between “winners” and “losers”.

As many of the dividend payers are receiving support from government programs such as JobKeeper, a public discussion has broken out about the appropriateness of such payouts.

The irony from this reporting season, thus far, is that the miners are swimming in cash, and showing restraint in paying out dividends, also because costs are rising and more capex needs to be spent.

Positive Beats

On FNArena’s early assessment, some 34.5% (19) of companies reporting has beaten market expectations while only 16.4% (9) delivered a “miss”.

If these numbers hold up until early September, then 2020 would easily become the best August reporting season in Australia since 2013, but, again, too early to make such projections.

What we can assess is that already a number of companies have crowned themselves to stand-out winners and losers for the season.

On the positive side, Goodman Group ((GMG)) yet again showcased to investors just how strong the shift to online spending has become.

It wasn’t that long ago Goodman Group shares offered no more than 3.5% prospective yield, which elicited quite the number of calls denominating the stock “grossly overvalued”, yet today the yield stretches no farther than 1.6%, signalling the stock has (more than) doubled in price since 2016.

And still growing strong, with analysts further lifting growth estimates, which elevates price targets further, allowing traders and investors to push up the share price higher without the risk of running out of oxygen.

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