In today’s article we highlight some key factors you should be considering in light of the Upcoming Earnings Season. With the ASX 200 trading above the 5600 level for the first time since the GFC many stocks are fully priced, so it will pay to monitor these stock positions in the next few weeks.
Aussie Market
The ASX 200 is trading above the 5600 level for the first time since the GFC (as at the end of July).
CHART: ASX 200 Index Performance (as at the end of July).
The chart above shows the ASX breaking to new weekly highs. The market performance in Australia in the past couple of years has been driven by the yield trades, thanks to the central banks globally remaining accommodative, thereby keeping interest rates at historically low levels. In 2014 the miners have begun to participate in the current up move, thanks to Chinese data showing the government is engineering a “soft landing” for its economy.
CHART: The Chinese Market Performance
The Chinese market has been on the rise for the past four weeks ahead of its corporate earnings season which continues until the end of August. It is experiencing its longest winning streak in a year and is its highest levels in seven months. Trader sentiment has been boosted as profits at industrial companies in China rose 18% in June on year, the largest jump since September (up from 8.9% in May) and two more Chinese cities eased restrictions on home purchases. Chinese PMI and CPI figures are due out Friday and will give a read on the consumer and manufacturing.
Upcoming Earnings Season
The Aussie market has run up hard into the earnings season, companies will have to report better than expected earnings to justify their current price earnings multiples. The ASX200 is up 19% since July last year, which has meant that many stocks are fully priced ahead of earnings, so that any disappointments will likely be severely punished, refer to QBE this week.
Investors will be keenly looking at company forecasts for future earnings. Analysts at CIMB are expecting companies to post a 7% earnings growth (EPSG) for next year (down from 9%), while analysts at Citi are expecting companies to post a 7% to 8% earnings growth (EPSG) for the year to June 2014. Citi Group analysts have quantified their earnings forecasts in the table below.
TABLE: Consensus Earnings Growth Estimates (source: Citi Research)
Some key observations from this table. EPSG for the market is expected to fall into 2015 for the market as a whole, dragged down by earnings in the resource stocks, while industrials are expected to see an improvement in earnings, as the global economy improves. For FY2014 the Transport and Media stocks are expected to be a drag, but there is expected to be a substantial turnaround in the coming 2015 year.
In this reporting season the Miners, Building Materials, Insurers and Diversified Financials are expected to lead.
MINERS – Investors will be monitoring the resource stocks this reporting season, where earnings are expected to have rebounded around 27% in 2014. The large cap iron ore miners have recently reported strong production figures, which will be assisting their bottom line compensating for lower commodity prices. Investors in the nickel miners will be looking for the strong run in the commodities price to translate to the bottom line, to support the recent run up in these stocks. Gold stocks have been hurt by the rising Aussie dollar.
MINE SERVICES – Explorers and Mining Services companies have been have hit by the cost cutting and capex reductions by the miners.
RETAILERS – The Retail sector is likely to have struggled, not helped by the May Federal Budget, which has weighed on consumer sentiment. Apparel retailers are also suffering from the unseasonably warm winter the country is experiencing. JBH is an exception.
BUILDING MATERIALS – The building materials companies rely on a cyclical upturn in the economy, which is yet to materialise.
BANKS – Banks remain the yield trader’s favourites and are expected to report record profits again, but dividend yield are down at 5% pa.
INSURERS – Have been rising steadily thanks to improving margins and the lack of major catastrophes. QBE is an exception, disappointing yet again.
FUTURE – We have done some analysis on these Consensus Earnings Growth Estimates (see chart above) forecasts and have highlighted where EPSG is forecast to rise/hold above 15% in the coming years. This information can be used by investors help them decide how to position their portfolios for future growth.
Themes
Some key themes to watch out for in the upcoming reporting season, include:
• Cost cutting, Aussie dollar, margin improvements and improved earnings forecast for next year.
• Forecasts on commodity prices, particularly iron ore, copper and nickel.
• Economic outlook for cyclical companies.
• Consumer confidence weighing on retailers.
• Mining activity slowing, weighing on economic outlook.
• Income traders will be on the lookout.
• Growing dividends – hard to find but Transurban and/or IAG may provide.
Negative Surprises
Some stocks where you need to be wary of include:
Newcrest (its PNG Lihir mine), Cabcharge (change to credit transactions), Toll (reflection of economic activity/Singapore), TEN and Fairfax (Media upheaval), Leighton (change of ownership structure), Orica (exposure to mine services) and AMP (life insurance business), Wesfarmers (Coles comps and Coal business to drag), Treasury Wines (another poor result expected).
Postive Surprises
CSL (great fundamentals), Crown (Macau exposure), InvoCare (people are dying to do business with them), JB Hi-Fi (bucking the consumer sentiment trend), McMillan Shakespeare (suffered from government FBT changes that failed to materialise), Harvey Norman (improving outlook for appliance and whitegoods business), Woolworths (improving margins on the back of inflation, to offset Masters result), Insurers such as IAG and Suncorp (improving margins, thanks to few major catastrophes).
The Trade
The earnings season started this week and ramps up in earnest in the second week through to the end of August Investors need to position themselves for this reporting season, because any negative surprises may result in sharp falls in equities price (eg. QBE). Given many companies shares are fully priced also watch out for those companies that provide muted guidance, eg MacBank (MQG).
Have you shopping list ready if you have some favoured stocks. Look for stocks in those sectors that are expected to grow earnings into 2015 to confirm. Sectors like Energy, Building Materials, Transports and Media (refer to Table above).
No matter what type of trading or investing you are doing, it is very useful to start attuned to the market, particularly during the reporting season. Today we have highlighted some key themes to monitor over the reporting season. Use your d2mxIRESS software software to build a watchlist of the stocks that we have highlighted today. Make sure that you are adequately insured if you hold stocks that could surprise negatively.
So you can do your homework and select the investment strategy that suits you or you can short cut the process by referring to a professional for assistance and we at D2MX Advisory can help. We here at D2MX Advisory can assist you with taking action to invest to energise your SMSF super fund and we have strategies designed specifically to take advantage of capital growth, and to generate consistent income and returns, that are scalable, contact us on 1300 610 024. If you would like some additional information on the fundamentally sound stocks that should be in your portfolio email me at advisory@d2mx.com.au
If you want to take advantage of the next dividend season, then we have a number of strategies that can boost your yield and returns. Contact us at 1300 610 024 or email Contact D2MX Advisory .
Michael Hevern
Investment Adviser – D2MX Trading
Also in the series Stock Trading Tips for All Types of Market Environments:
Part 1: A Simple Trend Finder Scanning Method
Part 2: Going For Gold
Part 3: Top-Down Analysis – A Valuable Approach
Part 4: The Power of Compounding
Part 5: Measuring Your Trading Performance
Part 6: Insuring Your Portfolio
Part 7: Aussie Dollar Strength and Your Portfolio
Part 8: Investing in 2013
Part 9: Investing in 2013 (continued)
Part 10: Yield Investing In 2013
Part 11: Investors, the results are in!
Part 12: Show me the money!
Part 13: Leading Indicators: Copper (1)
Part 14: Leading Indicators: Copper (2)
Part 15: Mind the Gap – Trading Risk with CFDs Versus MINI Warrants
Part 16: Simply Staying With The Trend
Part 17: Use Contingent Orders To Manage Your Trading
Part 18: The Aussie Materials Sector and Your Portfolio
Part 19 (a): Going For Gold
Part 19 (b): Going For Gold (Stocks)
Part 20: Silver Lining – Trend Identification
Part 21: Trading Your View
Part 22: Christmas Season Trading
Part 23: Stocks for the 2013 Christmas Hamper
Part 24: 2014 – Transition Trading
Part 25: Stop Losses, Slippage and Risk
Part 26: Investing For Yield
Part 27: Sell In May
Part 28: Gap Trading – The OOPS Trading Strategy
Part 29: “Sell in May (Close by July)” Strategy For Banks
Part 30: Swing Trading Tools – RSI
Part 31: Half-Time Report
Part 32: Early Trend Entry, Using New Highs
Part 33: Investment Themes Second Half 2014
This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.