Rudi's View | Aug 27 2020
Dear time-conscious investor: High PE stocks continue to benefit most this month, while one expert is calling for the next commodities supercycle
In this week’s Weekly Insights:
-August Reporting Favours Quality & Growth
-Morgans Model portfolios
-The Next Commodities Super Cycle
August Reporting Favours Quality & Growth
By Rudi Filapek-Vandyck, Editor FNArena
One observation that has caught my attention is that as times have become tougher for corporate Australia, more companies have decided to release financial results later in the season.
A quick run through recent years’ reporting seasons has revealed that by this time in August 2018, the FNArena Corporate Results Monitor contained some 70 companies more than it does this year.
These companies will still be reporting, of course, so expect a tsunami in catch-up financial results releases during the final days of August.
On multiple observations and measurements, reporting seasons in Australia worsened considerably after August 2018 (if we only concentrate on the February and the August seasons).
No surprise, the balance as to when companies schedule for financial results releases has noticeably shifted towards the final two weeks of each season.
Having noted the above, August 2020 has been, all things considered, surprisingly positive thus far.
If current trends hold up for the remaining 140 or so corporate results, then August 2020 will mark a return to the good old days pre-2019; when Australian companies mostly met or beat expectations, and analysts lifted valuations and price targets higher in response.
[Paying subscribers can access the archive for Corporate Results Monitors on the FNArena website tracing back to August 2013].
Thanks to detailed data analysis from JPMorgan, we can now also confirm reporting seasons in Australia are becoming more volatile with sharper price movements occurring in either direction.
Of course, every reporting season generates negative and positive surprises, and share prices tend to reflect this, all else remaining equal. But JPMorgan’s analysis clearly shows share prices, on average, respond through bigger moves nowadays and the number of sharp moves remains in an uptrend too.
Underlying all of this, remains a wide dispersion between “winners” and “losers” -quality and growth versus lagging value- and post February, a new kind of demarcation has sprung to life as the covid-19 pandemic has created its own set of “winners” and “losers”; virus beneficiaries versus victims.
With uncertainty high and only few companies willing (and able) to provide positive guidance for the year ahead, investors have proved remarkably forgiving in their treatment of companies that didn’t quite match expectations.
While JPMorgan’s research is correct in that daily volatility has become sharper and more intense, others are equally making the observation that many more share prices could have been slaughtered under different circumstances, but they received rather mild responses instead.
Indeed, UBS is arguing average volatility this month is actually down in comparison with prior seasons, on its own data analysis.
In ultra-simplistic terms: investors knew uncertainty and unknowns would dominate this season, and they had already decided to adopt the glass half-full approach.
This observation is further underpinned by the fact that share prices for companies that do not provide guidance for the year ahead on average have risen by 2% post financial results release.
Note also: the ASX200 has, on balance, gradually crept up higher as the season progressed. Led by, as UBS likes to emphasise, stocks trading on high Price-Earnings (PE) multiples.
As at Monday, 24th August 2020, the FNArena Corporate Results Monitor contained 159 results of which, on our holistic assessment, 54 beat expectations (34%) and only 28 missed (17.6%).
Never in the history of the Corporate Results Monitor have we ever witnessed the Beat/Miss ratio this close to 2. The highest ratio recorded since 2013 was 1.5 for both August 2015 and February 2016.
I don’t think it’s unreasonable to expect the percentage of misses to increase over the remaining days.
Equally noteworthy, the numbers yet again look a lot less promising for the ASX50, with only nine beats out of 37 (24%) versus ten fails (27%).
Earnings forecasts are declining, as they do in just about every reporting season, but price targets are going up by more than 4%, which is high on historical precedents, but not unprecedented.
Upgrades and downgrades in broker ratings in response to financial results are to date perfectly balanced; 34 each.