Reporting season, whether in February or August, is a great time to be an investor. We all get to find out whether we are right or wrong on particular holdings in our portfolios. The other ten months of the year we are merely speculating. So, on that note I thought it would be good to suggest some things to watch out for when analysing results, and how to prepare for the onslaught of data.
Preparation is key
Before reporting season even starts try and confirm when exactly stocks in your portfolio are reporting and mark them all down in the calendar. This is tricky to do for microcaps but at least try and do it the best you can.
In large cap stocks results dates are announced well in advance or can be confirmed by the investor relations team well ahead of time generally pretty easily.
Go through each stock in your portfolio and pick out 3-5 key things you are looking for in the result. You want to be able to quickly scan the result and decide quickly has it hit the mark or not. This preparation is helpful if you happen to have a few results all coming through around the same time.
By quickly scanning all 3 quickly you can prioritise which one needs a more in depth look by virtue of the results deviating significantly from what you were expecting. Given that trading volumes are usually higher than average around results time you want to keep time free to take advantage of this volume either for buying or selling as the case maybe. The quick scan method can help free up precious trading time. This is particularly precious time when trading in microcaps.
The first thing to look for when results come out is: has the result met market expectations? This could be in the form of specific management/board guidance around certain metrics, revenue, EBITDA, EPS etc. Or it could be the sum of where the sell side analysts covering the stock expect the key metrics in the results to come in at. Obviously not hitting the mark is a poor result and coming in above the mark is a good result and share price reactions are usually in tandem with which ever scenario eventuates.
However, in these heady days, especially, in high PE/high growth stocks even meeting expectations and delivering big growth numbers may not be enough. This is one of the key themes I will be watching in the microcap space this February. Especially given microcaps have run hard this year.
Quality of the Result
You often hear analysts say that a result was “high quality” even though the company may have just reported earnings that have come in just above market expectations. So, what does this actually mean? Essentially, it means that the company delivered its results with no real one offs that made it look better than it actually was.
For example, a company may have delivered 20% EPS growth as per market expectations but only because they had a lower than normal tax rate due to some off-tax benefit like the Trump Tax cuts for example. So yes, on a pure mathematical basis EPS grew by 20% but if you had used the prior year tax rate it would have come in lower.
Other things to look out for that generate low quality results are gains on the one-off sale of non-core assets, government grants not generally received yearly, prior year comparative numbers which contain a lot of negative one offs which sets the base artificially low for year on year comparisons.
Moral of the story make sure you are comparing apples with apples when looking at comparisons to prior periods. Try and factor out the one-off items as much as possible so you can get down to the cleanest set of core operational numbers as you can, both for the current period and the comparative period.
With close to 2,000 microcaps it is nearly impossible to stay across the story in every stock. During reporting season, I will quickly look at as many microcap results as I can. However, with stocks I am very interested in possibly reporting at the same time, I can’t generally give every result the focus I want to right there and then.
So, particular stocks and results which, on the face of it seem quite interesting I simply add their ASX code to my “Deep Dive” list with a little note or two on why the result looked interesting.
In other words, this is a list of stocks where I will review the results in more detail post reporting season in March or September. I may then after reviewing the result in more depth during this period try and chat to management, build a working valuation model and think about is it really interesting or not.
The main take away I guess, like most things in life, is that preparation, planning and hard work eventually lead you to where you want to be or what you want. In this case its finding profitable investment opportunities.