Two new high conviction stocks from reporting season

Similar to the August 2016 reporting season, the market's most important large-cap financial and industrial stocks delivered robust results - albeit with some notable exceptions in Brambles and Telstra. Outlook statements from the market leaders were again broadly cautious. Aside from stellar results delivered by the miners as expected, the story of reporting season was the ongoing rotation from mid-to-small cap growth stocks, back toward the large-cap laggards of 2016.

FY17 earnings expectations are stable

Revisions to earnings forecasts for industrial companies have proven far more resilient than recent reporting seasons. However, valuations remain above long run averages which is tough to justify versus forecast FY17 profit growth of only 7% (Industrials), cautious company outlook statements and low levels of capital re-investment.

Investment strategy remains cautious

Our Chief Economist Michael Knox warns that while the outlook for the US economy is good, and the outlook for US earnings is even better, the S&P 500 is now overvalued versus his modelling. The promise of much lower US corporate tax rates explains a large part of the optimism. We think that tax reforms are guaranteed a noisy passage through the US Senate and this makes inflated equity markets vulnerable to any disappointment.

Unearthing companies that can thrive regardless

Despite challenging conditions overall, we continue to identify individual companies capable of thriving in this environment. Amid the volatility in the mid-cap segment, under-recognition of strong results has created some notable opportunities for investors. Notable standouts include:

Bapcor (BAP) – the 1H17 result and upgraded guidance delivered even more confidence in BAP's growth profile and ability to outperform targets. Growth with defensive characteristics.

SpeedCast (SDA) – We are more confident than the market about SDA's ability to successfully integrate key acquisitions which we think can drive strong growth in cash generation.

Both BAP and SDA are new additions to our High Conviction list this month.

Following our review of the February 2017 reporting season we have identified 21 buying opportunities.

Contributed by Tom Sartor, Senior Analyst