Rudi’s View: August 2020 Lifts Price Targets

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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 10 2020

Dear time-conscious investor: Conviction Calls, stock ideas and investment themes post-August

In this week’s Weekly Insights:

-August 2020 Lifts Price Targets
-Stock Ideas & Conviction Calls
-Extras & Bonuses

August 2020 Lifts Price Targets

By Rudi Filapek-Vandyck, Editor FNArena

For securities analysts, each reporting season offers a welcome update on how companies are faring operationally, and this includes contracts, investments and sales, as well as margins, inventories and cash flows.

Within this framework, market forecasts had never looked as wide and as diverse as post-February, so the August reporting season has been more than just welcome, with widely diverging forecasts in many cases rejoining around a much more feasible middle ground.

For many an investor/shareholder, this background re-adjusting of modeling and forecasts is often largely ignored, even though paying attention can provide clues about future sentiment towards and the direction of a share price.

Not every investor is convinced these analysts are worth every cent they are being paid, but fact remains: upward and downward adjustments to forecasts act like a magnet on share prices, sometimes even on what looks like rather small changes.

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One of the easiest accessible indicators for what is happening behind the scenes of daily volatile market moves are consensus price targets for individual stocks.

In essence, these targets symbolise the general idea of where analysts think the share price should be, roughly, incorporating current information and with all else remaining equal.

As I have pointed out numerous times over the years, share prices often tend to converge with these targets, unless there are other factors in play that weigh on investors’ sentiment.

[Special Note: the FNArena service includes The Icarus Signal, which signals when share prices are above or very close to consensus targets, though investors should always include context and their own insights and observations when taking guidance from such a broad-based, generalising, automated tool.]

Hence, every reporting season one of the key indicators I look at is what happens to price targets once companies have publicly disseminated and discussed their financial performance, and analysts have digested the numbers, and put fresh insights through their now updated modeling.

In simple terms: when targets move higher, it’s probably because forecasts have gone up, and this usually means the share price will rise.

If the above coincides with a positive “surprise” (otherwise known as an earnings beat) and the share price is nowhere near the new targets, then you can almost be assured the share price is now being carried further by ongoing positive momentum.

Such momentum carries into general sentiment, and before you know it, we’re talking multiple weeks, if not months of additional gains.

The opposite holds true as well. Irrespective of whether a financial result met forecasts or not, if the outcome post-release is falling expectations and a reduction in valuations and targets, chances are very much in favour of persisting downward pressure on the share price.

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As happens in every reporting season, August offered plenty of examples for each of these scenarios.

AGL Energy ((AGL)) surprised most with a downbeat guidance and the consensus target for the stock tumbled to $14.84 from $16.45 prior to the FY20 release.

In response, the AGL share price quickly reset around $15 from $17-$18 before the market update.

The AGL board promised to pay out 100% of cash earnings to shareholders in the next two years, but this hasn’t prevented analysts from putting the knife in their forecasts, assuming near 100% payouts in FY21 and FY22, but ultimately forecasting a lower dividend in two years’ time.

The reset in profit forecasts is clearly visible on the bottom part of the share price graph that can be found via Stock Analysis on the website, idem for the reduction in consensus target.

The same basic principle applies to similarly underwhelming market updates released by companies such as Bendigo and Adelaide Bank ((BEN)), Blackmores ((BKL)), Challenger ((CGF)), Cimic Group ((CIM)), GWA Group ((GWA)), InvoCare ((IVC)), Japara Healthcare ((JHC)), Mayne Pharma ((MYX)), Origin Energy ((ORG)), Seek ((SEK)), Telstra ((TLS)), and Seven West Media ((SWM)).

In all of these examples, price targets have fallen post the release of financials, and in all cases the share price has not even made a half-hearted attempt since to close that glaring gap between share price and target.

Data-analysis from past reporting seasons in Australia has shown share prices post earnings disappointment are poised for persistent underperformance that can last three months, at times even longer.


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