My best and worst pick from reporting season so far

In this video I spoke with Scott Phillips to share an update on small caps reporting this results season. There’s been more beats from an earnings point of view than misses, but that’s looking backwards. Outlooks count because after all, the stock market buys the future and those have definitely been more negative. I also share one of the best results I have seen and one of the worst.

Transcript

Scott Phillips: Welcome everyone to another update on reporting season. I’m Scott Phillips, Head of Distribution here at Montgomery, and with me is Gary Rollo, co-portfolio manager of Montgomery Small Companies Fund. So we’re about halfway through reporting season, a week’s gone since we did our first take. Gary, what have you seen from reporting season so far? Give me a pulse check.

Gary Rollo: We’re just about halfway through. There’s been more beats from an earnings point of view than misses, but that’s looking backwards. Outlooks are the things that tend to count because after all, the stock market buys the future and those have definitely been more negative or sanguine than the market was hoping for. In terms of big issues that we’ve seen be flagged by management teams, there’s no doubt that we’re seeing inventory and balance sheet shape as a focus, and costs. Wage inflation is a big issue for these corporates out there right now. I would say in Australia probably running at about 4 to 5 per cent. Overseas more, so Australia better, but nevertheless, it’s a big focus for management teams.

Scott Phillips: So taking that into account what’s been working and what’s not worked?

Gary Rollo: Well, possibly the easiest way to segment that is to take a little bit of an overarching sector view. So let’s group it into the growth stocks. I mean, in small caps you’re looking for growth, so some of these high quality well-run growth companies, results is an opportunity for them to show their earnings power and their capability. The stock market tends to underestimate what a quality management team, what a quality position in the market can deliver. And when they show the results, you get a chance to see that. And of course the market looks at that and gets a bit excited again. So they’ve got a lot of their time. Their results are really starting to cut through the macro noise, I would say.

In cyclicals sectors, which depend more on the macro pulse, well, last week we did retail, so I won’t go back over that, but it’s been more or less the same there. Some extreme variability and where you’ve got weak management, for example look at the Baby Bunting result. That was a shocker. But say in resources where mining services companies, resources are their clients, the resource market’s strong, so all of that cost inflation we’ve seen some sectors struggle with, the mining services companies have had the opportunity to pass that on. They’ve been passing it on and so they’ve got the growth and they’ve got the margins. So that’s been a decent sector.

Scott Phillips: So as a quality focused manager, it sounds like looking for businesses that are able to have both good management, high quality revenue streams and earning streams is the place to be at the moment, not looking for speculative Hail Marys to come good at this point in time.

Gary Rollo: This is a stock pickers market now. Conditions are variable. An opportunity to pick which stocks we like, that’s where we’re going to make our money.

Scott Phillips: Okay, so give me your best result you’ve seen so far.

Gary Rollo: Best result? Well, there’s been a few. I’m going to pick on one that we had today. I’m going to pick on National Storage REIT (ASX:NSR). It’s a pretty boring company, but they’ve been growing their key metric. It’s something called REVPAN, so how much they can rent out their space for by 16 per cent and it’s been doing that now for two years. So that’s raised its expectations for the year. It’s a well run portfolio of solid assets. It’s got a number one position here in Australia and that’s done incredibly well. So we’re pretty happy with that one.

Scott Phillips: Just on that, I thought as rates back up, longer term bonds go up, REITs normally do poorly. Why has this one done so well?

Gary Rollo: Well, this one is an operating company as well as a rent collector. So if you’re just a passive asset holder, you’re exposed to those interest rate rises and you can’t really do much on the front end of your business to mitigate them. NSR just mentioned that REVPAN growth, they’re really optimising their portfolio efficient revenue frontier, so to speak, and that’s offsetting that increased interest rate rise.

Scott Phillips: Okay, and just quickly, give me your worst result you’ve seen so far. It’s probably a tough one.

Gary Rollo: A very interesting one. Iress (ASX:IRE), it’s a small cap darling, but to me it has been an investment crime scene for the last couple of years. You’ve got a high dividend payout ratio and a product portfolio that’s needed an investment. You’ve got stock buyback on, you’ve got a levered balance sheet, something’s got to give and you’ve now got a new CEO, he’s going to act like the sheriff in town. He’s going to have to turn that strategy around. And funnily enough, the market’s fearful of that. They had a bad result for the first half there. Consensus has still got this thing growing its earnings by 50 per cent in the next two years. I don’t see how that’s going to happen. So that one would worry me if I had that in the portfolio and we don’t.

Scott Phillips: All right, let’s wrap it up there. We’ll come back in a week’s time, have a look at some further results and get a pulse on what’s happening in the Australian economy. 

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