Investing in earnings leadership (and 2 ASX examples)

If you know nothing else about what drives share prices, understanding that earnings revisions have a huge impact would be crucial.

A company’s share price reflects the market’s expectations of future earnings. When those expectations change, either up or down, the share price tends to move swiftly to reflect the new outlook.

If an analyst raises earnings forecasts, it typically suggests stronger business momentum, improved margins, or better-than-expected revenue – factors that can be described as the company displaying earnings leadership.

It should come as no surprise, therefore, that companies with the most upward earnings revisions often outperform.

The kicker, according to Stuart Welch – Portfolio Manager at Alphinity Investment Management, is that positive earnings revisions are often serially correlated.

“By that, what we mean is that having one earnings upgrade increases the probability that you're going to have a second, third and a fourth”.

In the following Fund in Focus, Welch shares how Alphinity hunts for and invests in companies displaying earnings leadership, shares why those revisions need to be driven by real fundamentals, and provides a bull case for two ASX names that meet the criteria.

Watch the video above for the full insights, or read the interview summary below. 

INTERVIEW SUMMARY

Why earnings revisions matter – and repeat

The foundation of Alphinity’s approach is their belief in the power of positive earnings revisions – and more importantly, their tendency to repeat.

Welch explained: “We often see what we call an earnings upgrade cycle… very rarely is it one and done. We often see two, three or four earnings upgrades, and that’s the period of time that we like to be invested.”

This cycle stems not only from business improvement but also from analyst behaviour: 

“Analysts are often anchored and framing their future forecasts in the context of what their previous forecasts were.”

It’s these cycles that Alphinity hunts for, combining fundamental analysis with quantitative tools to identify companies early in their earnings upgrade journey.

Style agnostic, outcome-focused

Alphinity’s strategy is built to outperform across market regimes. Welch said the team is “style agnostic,” and balances exposure across “growth, value, defensive, [and] cyclical stocks.”

What matters most is that companies are showing “earnings ahead of expectations and getting their future earnings forecasts increased.”

He pointed to historical performance as proof: 

“We’ve been able to consistently generate alpha and excess return,” regardless of whether growth or value is in favour.

And that’s the ultimate hook for investors. “It’s all about performance,” Welch said. “We’ve been able to outperform the index and generate those excess returns… relatively consistently over time, which reduces a lot of the sequencing risks.”

Stocks in focus

Medibank: delivering consistent upgrades through operational excellence

One of the top portfolio positions at Alphinity is Medibank (ASX: MPL), a stock Welch says has shown “an earnings upgrade mode for the last three years or so.”

The private health insurer, according to Welch, benefits from “a very high quality management team, very good at managing claims,” and critically, it has “been at the forefront of changing clinical practice to improve patient outcomes and reduce claims costs as well". 

This combination has helped Medibank drive consistent earnings outperformance. The Alphinity team’s confidence comes from the fact that these upgrades are “driven by real underlying fundamentals,” which is essential to qualify for inclusion in the fund.

Welch highlighted that this isn’t a short-term blip: “We’ve continued to see those earnings upgrades come through.” As long as those revisions persist, driven by solid fundamentals, Alphinity sees Medibank as a core contributor to portfolio alpha.

Qantas: a turnaround story with structural tailwinds

Welch also pointed to Qantas (ASX: QAN) as another current overweight in the portfolio, driven by a renewed earnings trajectory under new leadership.

He praised CEO Vanessa Hudson’s impact since taking the reins: “She stabilised the airline since Alan Joyce has left and greatly improved a lot of those customer metrics, including on-time performance and net promoter score.”

But the bullish thesis doesn’t end at operational improvements. Hudson is also “investing back in the fleet, which is delivering real efficiency gains for the airline.” 

That investment, Welch argues, is occurring at a time of persistent demand for travel, supported by “reasonably full-ish employment and interest rate cuts that we’ve already had and are likely to get in the future.”

The combination of better management, strategic reinvestment, and macro tailwinds is driving the kind of earnings upgrades Alphinity looks for. 

As Welch put it, the key is that “those earnings are being driven by fundamental, stock-specific factors.”

Learn more

The Alphinity Concentrated 
Australian Share Fund is a well-diversified, high conviction portfolio of listed Australian stocks, suitable for investors aiming for a higher return and prepared to take additional volatility. For further information, visit the fund profile below or Alphinity's website. 

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