Rudi’s View: August Trends Have Darkened

Rudi's View | 10:00 AM

By Rudi Filapek-Vandyck, Editor

Reporting season is when investors receive a detailed insight into how companies are actually performing. Where is momentum? How strong is it exactly? And where are the weaker points?

But investing is all about the future and thus what is likely to follow next is arguably of much greater importance than what has been up until June 30th.

Consider, for example, that companies including Megaport ((MP1)) and BlueScope Steel ((BSL)) released financials that either met or bettered analysts estimates, but share prices have come under pressure because the outlook proved disappointing.

This is why FNArena thinks a simple statistic of meets/beats/misses on the basis of reported financials remains a flawed methodology.

Thus far this month, most companies meet or beat expectations, which is positive and vindicates the market's positivism up until this point, but outlook statements and guidances provided have largely been softer-than-anticipated.

The latter is not so positive and has turned into a defining feature in recent days.

Last week, the FNArena Corporate Results Monitor showed a reasonable balance between meets, beats and misses, with a slight bias towards the latter.

On Monday in the final week, the pendulum is notably swinging towards many more disappointments.

In most cases, it's all about a weaker outlook. Of the 189 assessments in the Monitor, 71 have been labeled as 'miss' (37.6%) versus only 57 'beats' (30.2%) and 61 results arriving in line with forecasts (32.2%).

This negative balance is more pronounced for the ASX50, but it applies equally to the ASX200 and all corporate reporters combined.

Interestingly, the numbers have notably deteriorated on the back of predominantly smaller cap companies reporting, including Accent Group ((AX1)), ARN Media ((A1N)), Autosports Group ((ASG)), Big River Industries ((BRI)), Inghams Group ((ING)), and Jumbo Interactive ((JIN)).

Admittedly, these companies do not represent the same clout or investor interest as, say, CommBank ((CBA)), Rio Tinto ((RIO)), Goodman Group ((GMG)) or CSL ((CSL)), but then the local blue chips haven't exactly presented a much rosier picture either.

What should concern is that FY24 estimates are gradually creeping higher, at least up until last Friday, but FY25 forecasts are moving in the wrong direction.

Not that long ago, forecasts were for a robust looking 5%-ish growth outlook without much contribution from resources. By now the average EPS forecast for the year ahead for the ASX200 is moving closer to the 3% mark.

It has elicited a rather dark comment from analysts at JP Morgan that the Australian share market, in the absence of a growth revival for resources, is at risk of becoming the growth laggard in comparison with international markets.

The irony is that Growth companies remain one of the few genuine stand-out segments this season - yet again.

Analysts at JP Morgan and Macquarie have both acknowledged as much with the latter identifying WiseTech Global ((WTC)) for the best post-result return thus far. Founder Richard White's life long achievement now comes with a market cap of nearly $40bn and an inclusion inside the ASX50, hence WiseTech's positive surprise is challenging a few views and opinions here and there.

Try: tech stocks are grossly overvalued. Or what about: small caps will have all the momentum?

One of the insights I've gained throughout the week past is the rather sharp share price rally in WiseTech Global shares was not so much inspired by shorters covering their potential losses.

The FNArena Short Report, taking data from ASIC, shows short positions weren't that high in the first place (only 1% of outstanding capital) but it will be interesting nevertheless to see whether that percentage has declined post release of FY24 financials.

Instead, some heavy buying from at least one local high-conviction fund manager has been occurring. Clearly, someone has been convinced this strong growth story has a lot further to go.