Market veteran Matt Williams, portfolio manager at Airlie Funds management, says earnings season has been extraordinary – but not necessarily for the numbers.

A wave of deal-making – including the TPG and Vodafone merger, Amcor’s tilt at US group Bemis, and Bingo Industries’ big waste buy – and a lift in investment made it clear that growth is back on the agenda.

And then, as the season hit fever pitch, the circus in Canberra exploded, reminding every investor that regulation looms as one of the biggest disruptive forces in the local market.

Beneath this, Williams says earnings were “good enough”.

“The economy is good and that’s showing up in the results,” he says.

Williams was one of six fund mangers who supplied their views on earnings seasons in a special Chanticleer survey. The fundies were asked to name the stocks that impressed them most, the disappointments, and the big trend they will watch over the next 12 months.

The hits

Williams was impressed with the results of CSLA2 Milk and the domestic businesses of both Qantas and Virgin Australia.

“That industry has produced some amazing numbers for both companies,” he said.

But his top pick was Wesfarmers, and specifically the brilliant performance of its department stores business, led by Kmart.

Williams says investors have waited for years to see Kmart’s momentum interrupted by something, be it economic conditions or competition from the likes of Amazon. But he describes the chain’s sustained performance under outgoing department stores boss Guy Russo as extraordinary.

Wilson asset management chairman Geoff Wilson also named a retailer as his top pick in the form of the reborn Speciality Fashion Group, which in April sold five of its six brands to Noni B and now consists of one brand, City Chic, which is the leading plus-size specialty retailer in Australia for women.

“City Chic has been able to generate strong double-digit comparative stores growthover the last few years and has a successful wholesale strategy into the US market,” Wilson says.

Dion Hershan, the head of Australian equities at Yarra Capital Management, was another impressed at the strength of the Australian consumer.

“Discretionary spending is growing and high performing retailers like JB HiFi and Super Retail Group are actually taking market share. Off a low base, online sales are growing significantly and demonstrating they can co-exist with some of the offshore online entrants like Amazon and Alibaba.”

Jelena Stevanovic, portfolio manager at Platypus Asset Management, plumps for a blue-chip as her top pick.

Cochlear was the most impressive result from the point of view that the company is focused on long term potential and committed to multi-year investment strategy to continue to build awareness of its products in adult patient population,” she says.

“The company could deliver higher short term earnings, but instead the focus is on re-investment of some of its profit growth to ensure better long term outcome.”

At Wavestone Capital, Catherine Alfrey and Graeme Burke were impressed by long-time market darling CSL (“a high quality result, driven by strong outperformance right across the product portfolio”) and travel site Webjet, which delivered strong consumer and corporate sales growth.

The misses

Alfrey and Burke’s list of misses includes Origin, which surprised the market by bringing hedging costs into underlying earnings for the first time, and Primary Healthcare.

“It’s large capital raising to fund essentially “stay in business” system investment, didn’t appear to win immediate investor support,” the pair said.

They also agreed with Stevanovic’s disappointment, Speedcast. While the company pointed to problems in its energy division for its guidance miss, she worries it has grown too fast with through too many acquisitions.

“It is very unlikely that all those businesses are properly integrated, which can cause a range of operational issues for an extended period of time,” she says.

Wilson’s disappointment was childcare group G8 Education.

“It looks inexpensive, with management doing all the right things including improving internal systems and driving efficiencies but the company is being impacted by large increase in supply (new child care centres being built), which has led to lower occupancy levels.

Williams’ disappointment for the season was Caltex, which fell 8 per cent after delivering its results Tuesday. He says while the result itself wasn’t too bad, the company deserved the drubbing due to its capital allocation strategy, a 5 per cent cut in its dividend, rising costs and rising capital expenditure.

“It’s just spraying capital left, right and centre and I think the market has voted with its feet,” Williams said, pointing to a string of deals that Caltex is either doing (including an investment in the Philippines) or has been mentioned in connection with (such as the takeover of Santos).

“We’d be encouraging more capital discipline and then capital then being redirected to a much higher payout ratio,” Williams said.

 Hershan is wary on the resources sector, which may well have run its race.

“The capital management and balance sheet repair cycle has largely played out, with signs of cost pressures – such as labour, energy and capital works – coming back for the first time in years,” he says.

“In many instances commodity prices have also peaked which is further pressuring margins.”

What to watch

What’s happening in the mining sector is also a theme to watch in the broader economy in next 12 months, Hershan argues.

“The return of cost inflation is an important theme in our view. It was very stark in US exposed companies including BramblesAmcor and James Hardie,” he says, pointing to pressures such as tariffs, transport costs, energy, and labour.

“There are tentative signs it is coming back in parts of Australia. In this environment it will be important to own the businesses with strong franchises and real pricing power.”

Williams and Stevanovic agree the big theme in the next 12 months is politics, as both sides head into an election keen to outdo each other. That’s already a big worry for some sectors such as health insurance and energy.

 Stevanovic can even see a nightmare scenario emerging for the politicians most popular target – the banks.

“With the current prime minister being the person responsible for the introduction of the bank levy, the risk is that this levy is increased further at the next budget,” she says.

“Electricity retailers are another industry at risk with recent changes to NEG putting more emphasis on margins of electricity retailers, therefore, materially impeding their competitive position. This change highlights just how quickly regulatory environment can change, increasing risk to any industry.”

Wilson’s big trend is “expensive companies becoming more expensive, a classic sign that the bull market is close to an end”.

Technology companies led this trend during reporting season, and Wilson points to WiseTech Global joined the 100x PE club, trading on an 2018-19 price-to-earnings multiple of 104x.

Alfrey and Burke are also nervous about tech stocks, where traditional valuation metrics are being abandoned.

“From our perspective, some Investors are confusing appealing business models with attractive and sound valuation metrics. To say it is different this time, will prove to be folly – it is a question of when, not if.”

James Thomson