Marcus Today: Rules For The Results Season
WHICH STOCKS WILL DISAPPOINT WITH RESULTS (AND WHICH WON’T)
We’ve had profit warnings from IAG, DOW, CIM, NHF, NUF, SUL, KGN and now TWE. The confession season is in full flight. Time for this perennial article – rules for the results season and a look at which stocks and sectors are most at risk over results.
The most likely thing to shock any shareholder and share price is company results. Results present a bi-annual moment of heightened risk for all stocks that report.
Thanks to continuous disclosure requirements (meaning companies ‘dump’ information at results) and high-frequency trading (some of which now hilariously detects adjectives in announcements and sells or buys in response to words like ‘warning’ or upgrade’), the results reactions can be surprising and savage. Multi-billion dollar companies, let alone smaller companies, can move 20% in a day on a results announcement, in the first minute sometimes.
It is laughable of course, as if a high profile fund manager like Fidelity (who are probably asleep in New York), or Australian Super (who are too big to do anything in the short term), has accurately researched, re-valued and decided to sell a company down to a new level in the time between the results announcement at 8:30am and the market open at 10:00am. They haven’t, they can’t, but even big stocks get smashed these days as if they have
Thanks to the herd that now thunders around the market in the short term, and the computers that react to a whiff, rather than a sniff, or even a taste, the results season has become a dangerous time.Holding stocks in February is like running around in an orange vest on a battlefield during an artillery barrage, you’re never quite sure whether you’re going to get blown up. And there is a bit of luck involved. So as usual at this time of year, here are the Marcus Today results season survival tips:
- Basic Vigilance. Find out when results are due for the stocks you are holding/trading. If you find a stock you hold is down 10% one morning after announcing results you didn’t know were due, it is a bit negligent. We will put a results diary up on Marcus Today tomorrow. But Tip 1 is find out when your company results are due. Here is the first week’s worth:
- Finding the good ones. The most profitable game if you can get it right is to guess which stocks are likely to surprise on the upside. They are often the companies that have surprised on the upside before, that have jumped on previous results or have recently had a positive earnings update. Go back and look at the last earnings announcement, the AGM maybe, a trading statement, a presentation, and see if the share price went up or down, whether it was positive or not, whether brokers upgraded the next day or not. It is unlikely a company that has seen earnings upgrades running into results is going to disappoint, and there is an even better chance they will not disappoint. So Tip 2 is check the recent announcement history. If there is a recent outlook statement, the risks are low.
- Avoid the bad ones – More than half the game these days is avoiding the disasters. Don’t bet on the unlikely, on a resurrection, on a falling stock. Don’t swim against the tide. It’s not clever; it’s dumb. It’s a game of odds, not heroics. Tip 3 – don’t bet on results being surprisingly good when the history is bad. For most of us, results are about risk minimisation, not risk-taking.
- The share price trend is rarely wrong. Another very plain indicator of whether a stock is likely to surprise on the upside or downside is to look at the share price trend running into the results. The market is rarely wrong. Good stocks tend to do good things, and bad stocks tend to do bad things, and the results announcements perpetuate the trend they don’t end it. Results are very unlikely to turn the current downtrend into an uptrend on a sixpence. Tip 4 – Don’t bet against the current share price trend.
- Dividend stripping. The traditional trade is to buy big income-paying stocks like the banks and Telstra some 50 days or more before the dividend ex-date. This allows income chasing investors to sell on the day it goes ex-dividend and still qualify for the franking under the 45-day rule. Income stocks tend to outperform during the 50 to 70 days before the ex-dividend date. So dividend stripping technique number one is to buy 50+ days out from the dividend and catch the usual run to the results and the dividend. Tip 5 (bit late now) buy big dividend stocks over 45 days ahead of a dividend going ex so you can catch the usual rally into the dividend and be able to sell it the day after goes ex if you choose to and in so doing still qualify for the franking under the 45 day rule (if that applies to you).
- The safest dividend strip of all. Rather than buy for the dividend before the results, the other income investor’s technique is to wait until the results are announced, not take the risk on the results at all, and if they are okay or good, buy the stock after the results and still collect the dividend that’s coming up. Its dividend stripping in full possession of the facts and avoids the gamble on the results. You can still hold the stock 45+ days after the purchase and qualify for the franking under the 45-day rule, and, if the results are good quite often, the stock will trend up after the announcement as well. Tip 6 – If you want a dividend, wait to see if the results are OK and if they are, you can buy before the ex-dividend date feeling ‘safe’.
- Buy the bounces. Sell the shock drops. There is an academic study about shock drops and shock rises in share prices. The conclusion was that when it comes to shares, a stock that has a shock move up or down continues to move in that same direction for the next nine days. It’s the nine-day rule. In other words, if a stock has a good set of results and pops up 5%, don’t say “I’ve missed it”, just buy it because it is likely to keep going in that direction for a while. Sharp moves (up or down) tend to start trends not end them, presumably because after a company announces good results, sentiment improves, not for a day but for a while. The research the next day will be upbeat. Brokers will raise target prices and recommendations over the next week, fund managers make decisions slowly, it takes a while for the news to be discounted. In other words, there is money to be made buying stocks after the results even if they have popped. You may miss the first day and the best day, but you’ll catch the next few days of trend, and your risk is much lower than punting ahead of the results. Tip 7 – Buy stocks that pop and sell stocks that drop on results (but maybe don’t sell on the open – see Member email below).
For traders, the main game over results is (obviously) to identify stocks that are likely to surprise on the upside whilst avoiding stocks that are likely to disappoint. “Likely” is the operative word. This is a game of odds, not certainty. If companies have had a recent earnings outlook statement that popped the price, if the drivers – like currency for international stocks, commodity prices for resources, interest rates for infrastructure and utility stocks – have been running the right way in the last six months (see below), then you narrow the odds of a positive surprise.
And the risk starts a month before the results are announced – because the confession season (when companies realise the broker forecasts are wrong and need to ‘re-focus’ expectations before the announcement) is just as painful. Don’t wait for the results season to check the recent earnings announcements of the stocks you hold, we are already in confession season, the announcements can come out anytime, good and bad. Confessions can come from anywhere anytime. Identify your risky stocks now.
And look out for broker research prior to the results season. Some of the brokers will do the work and guess all the good results and bad result for you. One or two brokers usually have a go at it. We included some of their guesswork below.
Meanwhile here are the obvious comments from Marcus Today for this results season:
Here is a list of the main market drivers over the last 6 and 12 months – this results season obviously reports on the last six months – these performance numbers over six and twelve months should give you an idea of how some sector drivers have performed, whether they have been swimming with or against the tide on their big drivers and the risk in the underlying stock results:
- The gold price was up 18% last calendar year and up 7.7% in the last six months. The backdrop to the sector is good. The market peaking and the coronavirus scare is all good for the sector, a hedge against a falling market (if it does).
- The oil price was up 5.05% in the last six months. Reasonable back drop. The price was up 35% in the last calendar year. No excuses to stuff up here.
- Anything with a lot of debt (infrastructure, utilities, REITs) have seen record low interest rates, which are as good as a profit upgrade although interest rates bottomed in the last couple of months of last year which has taken the shine off. Should be OK (low rates and the trend of official rates is lower) but the recent rise may take the shine of guidance.
- Anything to do with the stock market (MQG, ASX, CPU, GBT, IRE…fund managers, platforms) have enjoyed a solid stock market recovery in the last year, a nice back drop, although in the last six months our market is only up 1%. But that doesn’t matter, the stock market has been ‘healthy’ – no disasters. Business as usual, no profit warning excuses.
- The BNPL sector (APT, Z1P) will be reporting record growth. Watch out for the BNPL code of practice coming out this week.
- If the HUB24 and NWL updates are anything to go by the platform funds management space is still growing.
- Nickel – The risk is on the upside for nickel stocks with the price up 12.8% in the last six months.
- International stocks (CSL, COH, RMD, BSL etc…) have had no currency driver in the last year or six months – the A$ has been pretty much unchanged.
- The housing market is hard to pick – there has clearly been a price recovery this year (it started on election day) but whether that has created more activity/profit for housing related companies is debatable. Sentiment is better but not great.
- Auto-sector – Where the housing sector goes the auto-sector follows. Again, hard to call. Lets watch the first few results that will set the tone. CAR, APE, SUL, ARB, SIQ, MMS, GUD, AHG, SGF, AMA, ECX, ASG. Outlook statements should show a better outlook since the election.
- Staples – WOW, WES, COL – results had better be good on these record PEs. Risk on the downside at these prices.
- Banks – The pick up in the housing market is too late and too small and slow to positively impact these results and record low interest rates have not been good for net interest margins. So expecting subdued results.
- Agriculture – Drought and bushfires. Expect no good news here.
- Tourism – Bushfires and coronavirus – no good news here either.
- Travel stocks – Qantas.
- China – GDP growth is slowing but only as expected. Not a great back drop. But the main risk is that China facing stocks hedge their bets on the outlook statements in fear of the coronavirus outbreak. A2M, tourism stocks (SLK, HLO), travel stocks (QAN, FLT, WEB). All at risk of cautious statements.
- Although we know the iron ore stocks have enjoyed a fabulous year in 2019 (iron ore price up 32.27%) the iron ore price was actually down 16.17% in the second half of last year. The iron ore stocks have seen their ‘peak’ earnings. BHP production numbers have been well received this month but it is hard to see results blowing our minds. No profit warnings coming but stay sober on the earnings outlooks – more risk of downgrades than upgrades perhaps.
- Aluminium down 7% in the last six months (AWC).
- Coal, a terrible year (down 35%) and a bad six months (down 12%).
- Consumer discretionary – The risks are also on the downside as consumer confidence flags compounded by drought and bushfires in regional areas. Retailers are an odd bunch…some can thrive in weak consumer environments (those that are known for low prices – JBH) so some fail while others soar. Lots of bankruptcies this year – Jeans West, Bardot, Curious Planet, Bose, EB games and Harris Scarfe have all gone into administration and closed stores leaving shopping centres with vacant sites – not good for SCG or SGP.
SOME BROKER GUESSWORK
Morgans say earnings growth for this results season from the ASX 200 excluding resources has backed off from +6.1% to -2.2% with weakness in agriculture, retail and travel thanks to bushfires and drought. Companies that could disappoint they say include AGL, LNK, BAP, FLT, AMP, WES and MPL. Companies that might beat expectations include WPL, QBE, APT, BBN, STO, MPL, PME, IEL. Bell Potter also published a table of things to watch out for in the results season they mostly agree with Morgans:
DO I SELL ON THE OPEN AFTER A PROFIT WARNING
Had an email this morning:
Member Email: When I wake up to a profit warning of a stock I hold (Treasury Wine Estates) should I sell on the open the next day expecting it to start to downtrend, or should I wait and not get caught in the early panic.
Reply: There is obviously no general rule. I would avoid selling blind on the open. None of the funds I run are short term, our job is to pick and time growth and income stocks in the medium to long term. My timeframe is ‘forever’ hopefully if a stock behaves. So finessing the last penny before we exit is not a big consideration. But if you are a trader and have decided to sell (not a bad general rule when a company disappoints – it tends to develop a hangover) but are wondering whether to sell immediately or wait then I say wait. You generally get a large emotional reaction in the very short term and the chances of an over-reaction is high. Far better I think to accept you are going to take an initial hit (there’s nothing you can do about it) and spend the first day assessing the damage, seeing the response, reading the opinions, and the next day…reading the research. Then selling (or not) in possession of the facts and with an informed opinion. You take more risk of selling low if you sell in the middle of an emotional sell off. If you look at the recent profit warnings (DOW, IAG) they all saw the worst of it on day one and then bounced. My formula would be to accept you are taking a hit because there’s nothing you can do about it, its too late and make a decision after doing some homework and in possession of the facts.
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