It seems in this day and age almost any environment and any job can be turned into a reality TV show. What you need is tension, unpredictability and drama…welcome to the latest reporting season in the stock market! If it was ever made into a TV show, the title ‘Biggest Loser’ would take on a whole new meaning.
While there are quiet periods when investing, reporting season is not one of them. In a month, around 1,700 companies announce half (or full) year results. Investors then rush around trying to digest a great deal of information and update views, financial models and shift portfolios (if required) within a very short period of time.
Well, this February was no different. If you recall, late last year we shifted out of many stocks towards cash as we felt they had run ahead of our assessed fair values.
Results support valuations
It was a relief to most investors (I imagine) that results generally justified an ASX 200 Index around 5400. So despite some volatility in January, when the Index tested 5000 again, the Index has moved back to the highs it tested last November. It will be interesting to see if it can move through this range this time.
As a brief summary (kindly provided by Deutsche Bank), 58% of companies reported better than expected results and 47% of companies experienced analyst upgrades – while it was the best results period in years, in terms of corporate growth rates. It’s worth pointing out that much of this improvement has come from cost cutting and improved productivity. Having said that, some companies, such as Seek Limited (SEK), Carsales (CRZ), REA Group (REA and the company behind realestate.com.au), CSL Limited (CSL) and Domino’s (DMP) have continued to grow strongly. The price to earnings (P/E) ratios these stocks now trade at is very high. It’s little surprise that these companies are either exploiting the Internet and a structural shift in consumer behaviour, or are growing internationally.
Some major domestic-focused companies, such as Suncorp Group (SUN), Coca Cola Amatil (CCL) and Pacific Brands (PBG) have struggled to deliver growth reflecting the low growth environment Australia now finds itself in.
One standout for me was how healthy most corporate balance sheets are (most management consultants would say ‘under-geared’). The GFC was a big scare for company boards and de-leveraging has been the trend since 2008. Many companies now have net cash on their balance sheet. While this puts them in a better position to survive, it reduces their leverage to any sort of pickup in the economy.
The very general feedback from our meetings with company management about the economy is that the outlook is flat and growth is patchy. The only sector which is experiencing strong growth is residential housing, driven by low interest rates. Companies that are tied into this sector are generally more upbeat. If governments ramp-up infrastructure spending, this will help too and some of the really bombed-out market sectors may see better periods ahead.
The biggest concern amongst investors appears to be the outlook for China and of course, it’s a huge driver for the likes of BHP Billiton (BHP), Woodside Petroleum (WPL) and Rio Tinto (RIO). The share prices of all three are still well below their 2011 highs, while the big industrials that pay reliable dividends have done the Index’s heavy lifting over the last five years.
I remain cautious about many high yielding stocks that are fully priced on our metrics but remain confident of finding low risk opportunities that help us grow our investors’ capital and continue to pay them a steady and growing stream of fully franked dividends.
The stocks we have bought after the last reporting season are Azure Healthcare (AZV), Select Harvest (SHV) and Sirtex Medical (SRX).