Reporting Season

We had a question on the Marcus Today stock discussion group on Facebook today asking whether there was anything on the horizon that could upset the recent recovery in Orora (ORA). The most likely thing to upset any stock at the moment is the results. The results season is about to start – at the end of this month.

ORA’s results are on August 5th and as with any stock you have to guess whether they will be good or bad, are high risk or not and for that, you look to any recent earnings guidance and to the company’s main drivers and how they have performed in the last six months.

For ORA with 50.54% of their revenue coming from North America (which means they have enjoyed a lower A$ the last six and twelve months) and with a Macquarie presentation on May 1 that had an earnings outlook statement, you have to assume that the risks are low of a negative surprise.

ORA aside, the results season is a moment of stock market risk. Thanks to continuous disclosure requirements (meaning companies ‘dump’ information at results) and high-frequency trading (some of which now hilariously detects adjectives in announcements and sells or buys in response to words like ‘warning’ or upgrade’), the results reactions can be surprising and savage. Multi-billion dollar companies, let alone smaller companies, can move 20% in a day on a results announcement, in the first minute sometimes. It is laughable of course, as if a high profile fund manager like Fidelity (who are probably asleep in New York), or Australian Super (who are too big to do anything in the short term), has accurately researched, re-valued and decided to sell a company down to a new level in the time between the results announcement at 8:30am and the market open at 10:00am. They haven’t, they can’t, but it happens.

Thanks to the herd that now thunders around the market in the short term, and the computers that react to a whiff, rather than a sniff, or even a taste, the results season has become a dangerous time. Holding stocks in August is like running around in an orange vest on a battlefield during an artillery barrage, you’re never quite sure whether you’re going to get blown up. And there is a bit of luck involved. So as usual at this time of year, here are the Marcus Today results season survival tips:

  • Basic Vigilance. Find out when results are due for the stocks you are holding/trading. If you find a stock you hold is down 10% one morning after announcing results you didn’t know were due, it is a bit negligent. We will put a results diary up on Marcus Today soon. But Tip 1 is find out when your company results are due.
  • Finding the good ones. The most profitable game if you can get it right is to guess which stocks are likely to surprise on the upside. They are often the companies that have surprised on the upside before, that have jumped on previous results or have recently had a positive earnings update. Go back and look at the last earnings announcement, the AGM maybe, a trading statement, a presentation, and see if the share price went up or down, whether it was positive or not, whether brokers upgraded the next day or not. It is unlikely a company that has seen earnings upgrades running into results is going to disappoint, and there is an even better chance they will not disappoint. So Tip 2 is check the recent announcement history. If there is an outlook statement, the risks are low.


  • Avoid the bad ones - More than half the game these days is avoiding the disasters. Don't bet on the unlikely, on a resurrection, on a falling stock. Don't swim against the tide. It’s not clever; it’s dumb. It’s a game of odds, not heroics. Tip 3 – don’t bet on results being surprisingly good when the history is bad. For most of us, results are about risk minimisation, not risk taking.
  • The share price trend is rarely wrong. Another very plain indicator of whether a stock is likely to surprise on the upside or downside is to look at the share price trend running into the results. The market is rarely wrong. Good stocks tend to do good things, and bad stocks tend to do bad things, and the results announcements perpetuate the trend they don’t end it. Results are very unlikely to turn the current downtrend into an uptrend on a sixpence. Tip 4 - The low odds bet is to believe the current share price trend.
  • Dividend stripping. The traditional trade is to buy big income-paying stocks like the banks and Telstra some 50 days or more before the dividend ex-date. This allows income chasing investors to sell on the day it goes ex-dividend and still qualify for the franking under the 45-day rule. Income stocks tend to outperform during the 50 to 70 days before the ex-dividend date. So dividend stripping technique number one is to buy 50+ days out from the dividend and catch the usual run to the results and the dividend. Tip 5 (bit late now) buy big dividend stocks over 45 days ahead of a dividend going ex so you can catch the usual rally into the dividend and be able to sell it the day after goes ex if you choose to and in so doing still qualify for the franking under the 45 day rule (if that applies to you).
  • The safest dividend strip of all. Rather than buy for the dividend before the results, the other income investor’s technique is to wait until the results are announced, not take the risk on the results at all, and if they are okay or good, buy the stock after the results and still collect the dividend that’s coming up. Its dividend stripping in full possession of the facts and avoids the gamble on the results. You can still hold the stock 45+ days after the purchase and qualify for the franking under the 45-day rule, and, if the results are good quite often, the stock will trend up after the announcement as well. Tip 6 – If you want a dividend, wait to see if the results are OK and if they are, you can buy before the ex-dividend date feeling ‘safe’.
  • Buy the bounces. Sell the shock drops. There is an academic study about shock drops and shock rises in share prices. The conclusion was that when it comes to shares, a stock that has a shock move up or down continues to move in that same direction for the next nine days. It’s the nine-day rule. In other words, if a stock has a good set of results and pops up 5%, don't say "I've missed it", just buy it because it is likely to keep going in that direction for a while. Sharp moves (up or down) tend to start trends not end them, presumably because after a company announces good results, sentiment improves, not for a day but for a while. The research the next day will be upbeat. Brokers will raise target prices and recommendations over the next week, fund managers make decisions slowly, it takes a while for the news to be discounted. In other words, there is money to be made buying stocks after the results even if they have popped. You may miss the first day and the best day, but you'll catch the next few days of trend, and your risk is much lower than punting ahead of the results. Tip 7 – Buy stocks that pop and sell stocks that drop on results.

For traders, the main game over results is (obviously) to identify stocks that are likely to surprise on the upside whilst avoiding stocks that are likely to disappoint. “Likely” is the operative word. This is a game of odds, not certainty. If companies have had a recent earnings outlook statement that popped the price, if the drivers – like currency for international stocks, commodity prices for resources, interest rates for infrastructure and utility stocks – have been running the right way in the last six months, then you narrow the odds of a positive surprise.

And the risk starts now. Don’t wait for the results season to check the recent earnings announcements of the stocks you hold, we are already in confession season, the announcements can come out anytime, good (like PPS yesterday and HUB today) and bad. We have seen a remarkably small number of confessions so far this month but they can come from anywhere anytime. Identify your risky stocks now.

And look out for broker research prior to the results season. Some of the brokers will do the work and guess all the good results and bad result for you. One or two brokers usually have a go at it.

Meanwhile here are the obvious comments from Marcus Today for this results season:

POSITIVE DRIVERS

  • Anything to do with iron ore (up 57% in 6 months) will have record results.
  • Anything to do with the oil price (energy sector) has risk on the upside with the oil price bouncing 29% in the last six months (but still down 21% in the last year which is not great).
  • International stocks (CSL, COH, RMD, BSL etc…) have had the currency running for them (weak A$) in the last year – risks on the upside.
  • Anything with a lot of debt (infrastructure, utilities, REITs) have seen record low interest rates, which are as good as a profit upgrade.
  • Anything to do with the stock market (MQG, ASX, CPU, GBT, IRE…) have enjoyed a solid stock market recovery in the last six months, a nice back drop.
  • The BNPL sector (APT, Z1P) will be reporting record growth.
  • If the HUB24 and PPS updates are anything to go by in the last 24 hours, NWL is also doing very nicely in the platform funds management space.
  • Gold - The gold price has been up 9% in the last six months.
  • Nickel - The risk is on the upside for nickel stocks with the price up 19% in the last six months.

NEGATIVE DRIVERS

  • The housing market has been horrible thanks to falling prices and lower activity - anything housing related (mortgage broking, real estate agents, MGR, REA, SGP, REH) could surprise on the downside although the outlook statements should reflect much improved conditions since the election.
  • Auto sector - The risk is on the downside as well with the auto sector moving in lock step with the housing market. Car sales have been in a rare downtrend (CAR, APE, SUL, ARB, SIQ, MMS, GUD, AHG, SGF, AMA, ECX, ASG). Again, outlook statements should show a better outlook since the election.
  • Consumer discretionary - The risks are also on the downside thanks to the housing market and its impact on consumer confidence. Retailers are an odd bunch...some can thrive in weak consumer environments (those that are known for low prices - JBH) so some fail while others soar. Staples - WOW and COL - should survive.
  • Banks - The pick up in the housing market is too late and too small and slow to positively impact these results and record low interest rates have not been good for net interest margins. So expecting subdued results.
  • Coal - The coal price is down 25% in the last six months.

Here is a list of the main market drivers over the last six and 12 months - this results season obviously reports on the last six months - these performance numbers over six and twelve months should give you an idea of how some sector drivers have performed and the risk in the underlying stock results:

Last points:

  • The riskiest stocks come results season are the mid-cap and small-cap growth stocks. You really have little idea how the market will react but it can be heroic or savage with not a lot in the middle. It’s a bit like Lotto in a thunderstorm. You can be hit by lightning or made into a hero through no fault of your own. If you are like me, risk-averse, you might exit big holdings in smaller stocks over results to avoid the risk. You can always buy back in later, even if you do miss a pop. That’s the price you pay for sleeping the night ahead of results.
  • Post results is a fantastic time to do some stock-picking - companies are significantly de-risked for the next 3-6 months because the results have filled the information gap. You can confidently believe the numbers you are working off and value companies more accurately.

Good luck this results season – it’s a lottery, a risk, but with a little bit of research and common sense, you can narrow the odds significantly.

Read more from Marcus

Marcus Padley is the author of the Marcus Today stock market newsletter. To sign up for a 14-day free trial please click here.



Comments

Please sign in to comment on this wire.

USS Enterprise

Excellent, pragmatic, useful advice (as always). Not just waffly ideas that we read from some authors. The years of experience show through. Thanks Marcus.

Marcus Padley

Thanks Captain Kirk (you're not my Mum are you?)

Marcus T

Great article. Thanks Marcus

matt farmer

Well written excellent tips and insights

simon pardi

I guess we got that negative surprise ORA. And a pretty good one to.