Rudi’s Comprehensive February 2022 Review

Download related file: FNArena-Reporting-Season-Monitor-Feb-2022

A compilation of stories relating to the August 2021 corporate reporting season in Australia, including FNArena’s final balance for the season.

Content (in chronological order of publication):

–Risks To Consider
–February Looks Tricky
-Conviction Calls
–February Results: Macro, Traps And Opportunities
-Conviction Calls
–February Reporting Season – Predictions & Forecasts
-Conviction Calls
–More Beats Than Misses
–Too Many Distractions From Corporate Results
–Conviction Calls & Post-Reporting Season Notes
–Conviction Calls & (More) Post-Reporting Season Notes

By Rudi Filapek-Vandyck, Editor FNArena

Risks To Consider

Let's start with the good news. Historical data analysis suggests the final week of January and the first ten trading days into February usually represent a positive experience for the Australian share market.

Data analysis conducted by Hawkeye Analytics grants this period a "win"-rate of 17 from 22 periods.

The not so great news is history is not by definition a reliable guide. Being 'long' the ASX200 didn't work out well in 2016 and 2018, the two years that come immediately to my mind as recent examples of when equities started a new calendar year with lots of doubt and sell-orders.

Believe it or not, it wasn't such a great period in 2021 either, and that turned out a surprisingly good year for equity investors.

Twenty years ago or so one of the most popular sayings on Wall Street and in and around the ASX building on Sydney's Bridge Street was "so goes January, so goes the rest of the year". We've seen too many concrete examples since that have debunked that popular market myth.

You'd never hear it repeated in the years that started off on a sour note anyway. And some of those years delivered some of the big turnarounds that would offer oversized gains for those portfolios that were 'in' the market instead of on the sideline. Think 2016, but also 2009.

Let's face it, the only reliable conclusion we can draw from the dismal performance of share markets in the opening three weeks of January is that investors have had a re-think about valuations, risks and what can possibly lay ahead.

January is usually a positive month, which is why we can Google the "January-effect", and it is part of the November-April most profitable seasonal period for markets in many calendar years (but not always).

So let's have a look at what is weighing on markets' mind this early in 2022.

Putin and Ukraine, China and Taiwan

For the first time in a long while, a military conflict involving today's greater powers in opposing camps has become a genuine possibility.

Nobody really knows what Putin's real plan is. Does he want to test the West's resolve? Is he looking for longer-term bargaining power?

The real scary prospect is that Russia and China, behind the scenes, might be conspiring towards a New World Order. Beijing and Moscow might have coordinated intentions.

Imagine for a few moments the impact of Russia invading the Ukraine and China not much later employing its military might to annex Taiwan.

I don't want to scare the bejeezus out of you all, and let's hope such scenarios never materialise, but let's not be overly naive about this either. Moscow definitely can bring bad news over us all.

Inflation, Central Banks, And Bond Yields

It appears that what set off share market weakness in the US is a general shift in inflation expectations.

Most forecasters still remain of the view that nominal inflation is about to peak, and it should decline throughout the rest of this calendar year, but there's no disagreement that risks are rising and with omicron and supply chains disruption ready to stick around for longer, there is now a general sense that central bankers are getting more and more uncomfortable.

Hence, bond markets are now pricing in more rate hikes and sooner than late last year, while the December FOMC minutes revealed the Federal Reserve is thinking about shrinking its massive balance sheet; Quantitative Tightening as opposed to Quantitative Easing.

Markets have felt extremely comfortable while ample liquidity support was being provided by supportive central banks, but the removal of this support was always going to inject doubt and insecurity into the general mindset. What if excessive liquidity's impact has been underestimated in recent years?

What goes up must come down?

The added complication is that inflation has very much become a political feature in the US where president Biden's low approval rating has been directly linked to household budgets shrinking because of 7% nominal inflation.

Now take into account that inflation caused by workers being sick and in isolation cannot be solved through higher interest rates, and it should be clear central banks are facing a real conundrum.

That potential predicament can potentially become a lot more challenging as more and more analysts are forecasting a continued rise in the price of fossil fuels. Morgan Stanley has become the latest to forecast Brent oil priced at US$100/bbl later this year. Surely those who have been envisaging a rerun of the 1970s must be smiling.

Be careful what you wish for. The 1970s was one of the most challenging decades for equity markets.

Portfolio Rotation

Markets remain heavily polarised with new economy stocks and dependable over-achievers trading on above-average valuations and old economy stocks and cyclicals on much cheaper multiples. Thus a lot of pain gets inflicted whenever market momentum makes a decisive shift into the less popular 'value' stocks.

This latest momentum reversal effectively started in December. Just ask the fund manager whose portfolio filled with technology and biotech stocks plunged more than -12% throughout the month, and I think it's pretty much a given that January has continued the pain.

Extremely over-crowded market positioning is co-responsible as investors like to congregate in winning trades up until the point whereby the uptrend is no more and everybody heads for the exit.

Higher bond yields are always a negative for higher-valued, longer-dated, well-run businesses, at least in the short-term. And bond yields have further to climb if inflation stays high for longer. Some bond experts have expressed the view that bond yields are unlikely to peak before central banks have effectively started tightening.

Many of the cheaper-priced companies are looking ripe for a suitor, or positioned for upgrades, or ready to deliver on catalysts, and they are facing less headwinds from bond yields and/or inflation, at least at this stage of the cycle.

Corporate Profits

For the first time in a long while, the US corporate results season, which is currently in full swing, is not providing more reasons to keep buying companies trading on already high valuations.

In Australia, however, a forgotten phenomenon is making a roaring come-back, and it only further adds to the rising risk profile of the local share market.

Companies are issuing profit warnings ahead of their financial results scheduled for February.

On Monday, as I am writing this week's Weekly Insights, all the chatter is about online furniture retailer Adairs ((ADH)) whose shares closed down in excess of -20% on the day following a disappointing trading update.

Earlier, the likes of Redbubble ((RBL)) and Megaport ((MP1)) disappointed with similar impacts, but the risk does not simply reside with technology and retailers. On Monday, Regis Resources' ((RRL)) quarterly production update was good for -13.8% on the day off an already very beaten-down looking share price that not that long ago was trading at a price nearly three times as high.

I think there's a message in these profit warnings in that the February reporting season might prove a lot riskier than the seasons from the past two years.

While it never is easy to identify the next company to drop the proverbial unexpected bombshell, it's probably not a bad idea to dial back on the overall risk-taking.

Slowing Growth

Financial markets have consistently underestimated the persistence with which the global pandemic continues to impact on society and economies.

Look no further than the fact shares in Flight Centre ((FLT)) surged to $25 in early October last year. They're now back at around $16.50. And there are plenty of other examples around.

Last week, Macquarie lowered its forecasts for multiple healthcare services providers, including Ramsay Health Care ((RHC)) and Cochlear ((COH)), as the return to normal for the sector continues to be pushed further out.

Macquarie's move can serve as yet another signal that many companies might find it tough to meet market expectations next month. In the same breath, the market's hesitance to price in higher and stickier inflation can equally be described as a case of too much optimism that simply couldn't be met.

It's good to keep this in mind when steering portfolios in the direction of ongoing strong economic growth this year. Analysts at Bank of America are preparing their clientele for a "recession scare" this year. Local market strategists at Macquarie concur: the health of the global economy is not what it appears to be.

Instead of buying commodities and cyclicals, Macquarie's favour lays with healthcare and staples, your traditional defensives in light of decelerating economic strength. While it may not have become undisputably clear to everyone from the latest data updates across the globe, Macquarie has spotted enough evidence to predict momentum has started to turn south.

History shows the combination of slowing growth and hawkish central banks, let alone higher-for-longer inflation and interest rate hikes usually does not come about without serious impact for equities. Macquarie has been preparing for a -15%-20% downward correction in Australian equities in 2022, with the Federal Reserve to change course only when equities approach or exceed the -20% decline.

Apart from the two favourite sectors mentioned, Macquarie also expects gold, real estate, utilities and telcos to outperform this year. Mind you, there are plenty of analysts and strategists who advocate overweight positions towards banks and the energy sector.

The summary above might not necessarily cover every potential risk that is weighing over risk assets this early in 2022, but I think it's only fair to state there is a lot to digest and to consider for financial markets. This almost by default means the outlook seems a lot more volatile and challenging.

How we, as investors, deal with this situation is very personal. But my favourite starting point for individual investors is always: do you sleep at night?

My personal approach over the years is that I use these periods of increased volatility and big draw-downs as an opportunity to cleanse the portfolio, increase cash, and be ready for whatever comes next. It may not be the most optimal strategy in that selling shares at the most optimal point is usually only logical in hindsight, but I feel anything is better than simply keeping the fingers crossed and hoping for the best.

More importantly, probably the best description I have come across recently is that market sentiment acts like a pendulum, implying it overshoots on the upside when things look great, and it is prone to overshoot to the downside when things look risky and uncertain.

It also implies investors will be presented with excellent opportunities, but we can only grab them when we are ready, with cash at hand.

February Looks Tricky

2022 is already shaping up as a much more volatile and challenging year for investors, and we're still only at the beginning!

Geopolitics aside, the Big Question that is now on investors' mind is whether the January sell-off has gone too far already, or should we expect more downward pressure for longer? Equities have, broadly taken, sold off by -10%, by -20%, or by more depending on valuations, sectors and whether there has been a specific bad news event.

Even more telling is that circa 50% of the technology stocks included in the Nasdaq are now -50% or more below their share price peak from last year. Taking a broad glance over price charts, there's a fair argument to be made the correction/de-rating for global technology stocks has been causing havoc, to various degrees, for about three months now.

There will come a time when enough is enough, not because bond yields will not rise forever but because many of today's technology darlings are high quality, well-run businesses and they are still carried by megatrends. Megatrends, as I like to point out, last beyond a few rate hikes here and there and the occasional bubble in market exuberance.

Irrespectively, the market is always ready to teach investors harsh, but valuable lessons. It's our choice whether we want to learn from those experiences, or not.

In terms of technology and high quality companies, I believe one of these lessons comes through the variety in damage done to respective share prices. Why is one share price down by -50% and more while another share price has only fallen by -15% or so?

My first guess would be: a marked difference in quality and underlying operational dynamics.

There are times when such characteristics don't seem to matter, but eventually they will. Though I would caution to view this global sell-off solely as a black-and-white assessment. A great company with excellent multi-year prospects can still sell-off a lot more than -15% if its share price was bloated beforehand.

This is why successful investing isn't always straightforward and easy; it's why personal insights, knowledge and details matter. And then, of course, there are those cases where price action is completely the opposite of what it should have been.

Earlier today, I updated share price performances for my lists of All-Weather performers and prime growth stories on the FNArena website only to discover the Ansell ((ANN)) share price hadn't fallen at all up until January 28th.

Today (Monday), Ansell management issued a profit warning and the share price was punished by more than -14% in response. One could argue: this merely pulls Ansell shares in line with others such as Breville Group ((BRG)), IDP Education ((IEL)) and Fisher & Paykel Healthcare ((FPH)).

But also, Ansell's experience follows numerous others in January, signalling there is real and tangible risk out there from companies unable to cope with rising costs, supply chain challenges and covid-interruptions. ResMed ((RMD)) too could not meet market expectations on Friday, but at least its share price received a rather mild brush over on the day.

Ironically, and I am not making any of this up, Ansell and ResMed shares will end with a not too dissimilar performance throughout January. So there is a healthy dose of logic hiding behind what at times seems like a madhouse of crazy share price punishers. Or maybe I am simply reading too much into short-term price moves.

I think ResMed's prospects look a lot better than Ansell's at this stage, and many of the professionals who analyse healthcare stocks in Australia would wholeheartedly agree with that statement. And then there's the other side of the coin: small cap technology aspirant Straker Translations ((STG)) posted a stronger-than-forecast December quarter performance and its share price surged by 17%-plus on Monday.

To provide the full picture: shares in Straker Translations had pretty much halved since mid-last year. That's not an unimportant detail.

Okay, I'll spell it out: Straker Translations is not a ResMed, a CSL ((CSL)) or an Amcor ((AMC)), and within that typical technology basket, it's not of the same ilk as Pro Medicus (PME)), Megaport ((MP1)) or Xero ((XRO)), but it is possible to achieve much greater returns from companies that have so much more to prove and to achieve – in the short term.

Where things get interesting for longer-term oriented investors is that the higher quality, proven performers will at some stage stop falling and it won't be at -50% as has happened with Straker Translations and many, many others.

Successful investing goes hand-in-hand with a firm eye beyond the short-term price action, even if this oft seems illogical or counter-intuitive.

The outlook for 2022 still consists of rate hikes and higher bond yields and slowing economic growth. Equity markets have now fully taken on board the first, but what about the second?

It's going to be volatile by definition.

Short-term, I'd say the bias leans towards more negative than positive surprises for the four weeks ahead, of which the first two weeks will only see a gradual trickling in of financial results.

This almost by definition implies that portfolios will be hit sometime, somewhere, and potentially multiple times.

Two things will come in handy to successfully manoeuvre this month's tricky season:

-have cash to jump on opportunities, as well as to limit portfolio risk

-have the ability to ignore short-term price action and keep the focus beyond the immediate

The selection of potential dangers and opportunities under 'Conviction Calls' below might come in handy, but do keep in mind there is no such thing as 100% certainty.

To view my All-Weathers and other lists: https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

Conviction Calls

Looking ahead to the February results season, Macquarie strategists see risks pointing to the downside with central banks having turned hawkish (or: less accommodative, whatever the angle) and the global economic cycle is slowing which makes for a rather powerful, but treacherous environment for many ASX-listed companies.

Those who dare to come out with negative news might be disproportionally punished, the strategists warn.

Macquarie's best ideas into results from the ASX100: Amcor ((AMC)), Cleanaway Waste Management ((CWY)), Dexus ((DXS)), Origin Energy ((ORG)), Seek ((SEK)), and Santos ((STO)).

Outside of the top100, Macquarie's preference lays with Contact Energy ((CEN)), Costa Group ((CGC)), GUD Holdings ((GUD)), Gold Road Resources ((GOR)), Megaport ((MP1)), nib Holdings ((NHF)) and Whitehaven Coal ((WHC)).

On the negative side, the broker is worried about potential negative surprises from Inghams Group ((ING)) and Ramsay Health Care ((RHC)).

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Small cap analysts at UBS are equally worried that earnings momentum is now skewed towards negative surprises with the broker's earnings forecasts already four months into a downward sloping trend.

For February, UBS is most worried about AMA Group ((AMA)), EML Payments ((EML)), Flight Centre ((FLT)), G8 Education ((GEM)), Dubber Corp ((DUB)) and Temple & Webster ((TPW)) while others might be forced to issue a negative outlook, including Audinate Group  ((AD8)), Perenti Global ((PRN)), Kelsian Group ((KLS)), formerly known as SeaLink Travel Group, Dubber, Kogan ((KGN)), and NRW Holdings ((NWH)).

UBS's favourites ("key buys") are Adairs ((ADH)), Breville Group ((BRG)), BWX Ltd ((BWX)), Corporate Travel Management ((CTD)), EML Payments, GUD Holdings, Kelsian Group, Nitro Software ((NTO)), NRW Holdings and Siteminder ((SDR)).

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While the rising real yield environment represents a tough environment for the local tech sector, sector analysts at Citi expect secular trends to continue to drive growth which should result in improving free cash flow for tech companies. Maybe their view would be best summarised as: don't throw out your babies with the bathwater, even if you're worried about rising interest rates.

Citi's key sector picks are Xero ((XRO)), Megaport and REA Group ((REA)).

Citi analysts covering the leisure sector have elevated Ardent Leisure ((ALG)) as their small cap sector favourite ahead of reporting season with borders opening, increased visitor numbers at Dreamworld and the resumption of the Main Event roll-out all seen as very promising omens for the company's future.

Operator of health centres and gyms, Viva Leisure ((VVA)), is equally rated as Buy.

Elsewhere, colleagues researching small cap retail have expressed their preference for Nick Scali ((NCK)) and Harvey Norman ((HVN)) while those on the food and beverages desk most prefer Bubs Australia ((BUB)) and a2 Milk ((A2M)).

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Local market strategists at Morgan Stanley see a solid case for near-term outperformance for resources and the broker's Model Portfolio is thus Overweight the sector. The broker believes resources companies might well enjoy multiple months of upgrades to forecasts, which usually translates into ongoing strength for correlated share prices.

One of the eye-catching changes made recently by the broker's energy desk has been an upgrade in the price forecast for Brent oil to US$100/bbl but the analysts see commodities as a protection against inflation, as well as against rising geopolitical risks.

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Software-sector enthusiasts at Shaw and Partners are making a case for renewed interest in local ASX-listed software companies, with the fierce January sell-off for the sector now having opened up great opportunity, suggest the analysts.

Their sector preference continues with Mach7 Technologies ((M7T)), Whispir ((WHP)), and Gentrack Group ((GTK)).

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UBS has set a year-end target for the ASX200 of 7800, meaning growing profits are expected to withstand a mild contraction in market multiples as bond yields rise.

UBS's portfolio preference lays with cyclicals and domestic oriented companies, with financials, energy and consumer discretionary the three most preferred market exposures. Least preferred are consumer staples, technology, media & telecom, utilities and real estate.

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Market strategists at stockbroker Morgans clearly prefer the glass half-full approach, seeing plenty of scope for local companies to surprise on the upside in February, though they do concede it is likely that cautious guidances will dominate, and this might dampen investors' enthusiasm post-result releases somewhat.

Morgans has identified 13 companies it believes are better placed than most in dealing with cost inflation and margin protection, including Aristocrat Leisure ((ALL)), Amcor, Brambles ((BXB)), NextDC ((NXT)), REA Group, Sonic Healthcare ((SHL)), and PWR Holdings ((PWH)).

It has to be pointed out, Morgans had selected Ansell as the potential deliverer of a positive surprise and that idea went quickly out the window on Monday as the company issued a profit warning.

Apart from Ansell, other counter-consensus calls ahead of February are Cochlear ((COH)), Nanosonics ((NAN)), Ramsay Health Care, Rio Tinto ((RIO)), and Australian Finance Group ((AFG)).

The broker is worried about potential earnings risk for CommBank ((CBA)), CSL ((CSL)), Rio Tinto, Cochlear, and Ramsay Health Care.

February Results: Macro, Traps And Opportunities

Contrary to popular belief, bear market periods are actually quite common in global markets.

Pre-GFC we all liked to think there would not be a repeat anytime soon of the Nasdaq meltdown post March-2000, but, depending on the chosen definition, it's not too difficult to identify late 2007-March 2009, 2011-mid-2012, May 2015-February 2016, late 2018 and the first quarter of 2020 as bear market periods with similar base characteristics.

Common observations for all these periods involve heavy volatility (at times into never-before-witnessed-extremities), indiscriminate and forced selling (not always possible to distinguish the two), with an underlying tendency to end up at a lower price point, irrespective of multiple big rallies to the upside, triggered by short-covering or otherwise.

Overall sentiment usually turns very dark as investors worry about a total collapse or the-end-of-the-world-as-we-know-it. Very scary price charts make their appearance and comparisons with the 1930s or 1987 are drawn.

This time around the worry is that central bankers have left it too long to adjust their ultra-accommodative policies and that inflation, in combination with slowing growth in fragile economies, might wreck global equities and domestic properties.

It is my observation these periods of great market uncertainty are a process that needs to run its course. And, contrary to what some forecasters might pretend, the end outcome is never this early set in stone already. History also suggests worst case scenarios have a habit of, ultimately, not materialising, or only on very rare occasions, like 1929, 1987, 2000 and 2007.

None of this means investors should not take heed of the fact that risks are present; these risks are tangible and they can, potentially, cause great distress and severe portfolio damage. My own biggest concern for a while has been that central bankers lose their confidence and start tightening too firmly and at too rapid a pace while most economies around the world are decelerating into a mid-cycle slow-down.

We can but speculate what such a scenario would do to markets, but it most likely won't be pretty. Bond markets are pricing in a firm acceleration in countries like the US and now also the eurozone, but it still remains to be seen whether central bankers will walk that path as it has been laid out.

It is well possible that, from a data release and news driven angle, markets are currently caught in the midst of peak-inflation-fear, and there's likely a lot more in portfolio re-alignments that still needs to happen. Also, even if the general view that consumer price inflation should peak this quarter and start deflating throughout the rest of the calendar year proves correct, an oil price approaching US$100/bbl and the threat of an energy crisis in Europe are not helping with calming investors' nerves.

In terms of market price action, it doesn't appear markets have as yet seen the point of widespread capitulation. This in itself is a worry too.

Put it all together, and I think investors should prepare for a number of weeks of the same underlying market dynamics, at least. Maybe if the Fed delivers that very first rate hike. Maybe if the oil price corrects to the downside. Maybe if inflation data releases start showing  lower numbers. Maybe at some point the bond market has reached its ceiling in terms of pricing in future rate hikes.

Maybe Russia and NATO can come to an agreement.

The good news is history shows bear markets tend to be much shorter than bull markets. The not so good news is we might still be only at the front end of the current process.

Buckle in and don't get impatient!

February 2022 – Reporting Season

Regardless of the many global uncertainties, operational dynamics for corporate Australia presently seem too fragile and too unpredictable to instill a lot of confidence about the future strength and trajectory of profits and cashflows.

Early reports delivered by the likes of Amcor ((AMC)), Credit Corp ((CCP)), Janus Henderson ((JHG)), Nick Scali ((NCK)), Pinnacle Investment Management ((PNI)), REA Group ((REA)), ResMed ((RMD)), and two of the major banks have already delivered plenty of food for thought for local investors.

Equally telling: Westpac ((WBC)) shares are the only one mentioned that booked a gain upon market update and managed to hold on to those gains!

So what have we learned from early results releases so far?

Companies are struggling. If it's not the inability to source supply or to hire new staff, the omnipresent virus and its many impacts and limitations are weighing down on operations and margins. And investors are in no mood to ignore, forgive or forget.

Under different circumstances, a better-than-forecast quarterly result by Australia's leading property portal, REA Group, might have put a small rocket under the share price, in particular since the share price had already come off by circa -17% since November, but  this time the weakness has continued post release.

Within this context, it is probably worth pointing out this year's February result season has been preceded by a number of profit warnings, as well as a noticeable number of disappointing quarterly production updates from miners and energy companies. In most cases, rising costs were the main cause for disappointment.

On the other hand, Westpac's quarterly update was far from fantastic, with margin pressure alive and kicking and stringent cost control the absolute necessity. But market expectations had been assuming worse, and thus the Westpac share price has rediscovered upward momentum. ANZ Bank ((ANZ)) didn't quite have the same experience.

There might be a strong signal in here for investors. Quality performers that perform well won't necessarily be rewarded this season, but maybe the underperformers that avoid worst case scenarios will?

I note AGL Energy ((AGL)) has been among the best performers on the ASX over December and January, as well as Virgin Money UK ((VUK)), Crown Resorts ((CWN)), and Origin Energy ((ORG)). The latter's share price is supported by a general expectation that an extra payout to shareholders will be announced with the release of interim financials following the sale of equity in the APLNG project.

Taking guidance from the Telstra ((TLS)) experience over the year past, investors are likely to retain their enthusiasm for companies ready to announce asset sales and pass on part of the proceeds to shareholders. News Corp ((NWS)) might be next with rumoured intentions to soon list Foxtel.

Investors should also note how firm the share price in Nufarm ((NUF)) is holding up now management has communicated its five-year growth plans.

Themes that will continue to dominate the landscape throughout February include M&A and dividends, with potential upside surprises from miners and maybe large cap financials too, and the all-important cost control. Some analysts believe companies will remain reluctant to quantify their outlook if they don't feel costs can be contained.

Interestingly, technology analysts at RBC Capital have remodeled their sector valuations with higher bond yields as key input, alongside several of the now widespread challenges facing corporate Australia. As a general rule of thumb, report the analysts, this has reduced valuations across the sector by some -15%.

All in all, earnings forecasts in Australia have held up in the second half of 2021, but predominantly because of higher-for-longer commodity prices. This year market forecasts are falling. If history can be relied upon, forecasts will be lower again once the February reporting season has run its course, though market strategists at stockbroker Morgans disagree.

Morgans' positive view is partially based on the assessment that analysts have largely positioned forecasts cautiously, hence there should be more room for upside surprises a la Westpac.

All shall be revealed over the weeks ahead.

Corporate Margins – How Much Should We Worry?

Market strategists at UBS believe the bias is to the downside, but they also observe that if today's expected earnings growth of circa 13% for FY22 declines to, say, 9% this would still represent a pace "noticeably above trend".

UBS also points out that inflation on goods should be plateauing from here, making it easier for companies battling rising input costs through goods to pass it onto customers and consumers. On the other hand, services inflation has likely further to run, and is probably more difficult to pass on.

UBS research does nevertheless suggest most sectors on the ASX are operating on profit margins not far off from historical averages, suggesting any concerns about unsustainable profits seem misplaced. The sole exception is the healthcare sector where operational margins have substantially increased in recent years.

At the company level, UBS analysts have discovered the trend is for companies in higher margin businesses to expand margins most over recent years.

One sector that is facing more margin pressure in Australia are building materials companies. UBS doesn't see pressures from supply chains, energy and labour to ease anytime soon and this, up to a degree, offsets the favourable outlook for companies in Australia and the US. UBS's favourites in the sector are James Hardie ((JHX)) and Reliance Worldwide ((RWC)).

James Hardie was equally on other analysts' lists and the company -sometimes referred to as possibly Australia's highest quality cyclical- once again delivered on Monday, including upgraded guidance.

Another trend, UBS suggests, is for Australian businesses to start playing catch-up with capex spending trends elsewhere in order to make business models better protected against change and labour market tightness. Most sectors of the ASX seem to have decelerated their relative capex spending over recent years, according to the broker's analysis.

UBS thinks investors will welcome the shift.

According to Morgans, companies that fare better than most in combating cost inflation and protecting their margins include Aristocrat Leisure ((ALL)), Amcor, Brambles ((BXB)), NextDC ((NXT)), REA Group, Sonic Healthcare ((SHL)) and PWR Holdings ((PWH)).

Meanwhile, equity strategists at JP Morgan point out corporate earnings in the US have thus far performed better than expected, yet again. They think analyst forecasts over there are too conservative and estimates for Q4 will have to rise.

Bond Yields Not Always Most Important

Infrastructure analysts at Morgan Stanley acknowledge rising bond yields by default pose a headwind for infrastructure stocks, which might make it easier for the likes of Qube Holdings ((QUB)) and Aurizon Holdings ((AZJ)) to outperform their peers this year.

But Morgan Stanley also thinks the theme of traffic recoveries as economies re-open will prove a mightier influence and thus toll road operators and airport stocks carry the broker's favour.

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Put it all together, and it's probably not unreasonable to conclude risks are a-plenty and less easy to avoid this season. So what's the best strategy?

The FNArena/Vested Equities All-Weather Model Portfolio raised its cash level substantially in December and January, mostly through generally reducing existing positions.

As I have oft explained previously, I regard these tough and volatile periods in the share market as the ideal trigger to clean up the portfolio. Contrary to general practice, I never am looking to take or secure profits. Instead I consider such times as an opportunity to return to basics and question my confidence and conviction.

As such, a decision was made to sell all shares in Ansell ((ANN)), a decision that was subsequently vindicated as management was forced to issue a profit warning. However, post the subsequent sell-off in the stock, Ansell was quickly returned into the Model Portfolio on the belief that on a 1-2 year horizon, the shares offer excellent opportunity/value.

The expectation is the February results season will offer plenty more opportunities, though we shall need to remain nimble and selective, while also keeping a close eye on what happens at the macro-level.

Winners & Losers – The Forecasts

Companies likely to surprise in a positive manner, according to analysts at Goldman Sachs, include Nine Entertainment ((NEC)), Sims Metal Management ((SGM)), Iluka Resources ((ILU)), Tassal Group ((TGR)), HealthCo Healthcare and Wellness REIT ((HCW)), Jumbo Interactive ((JIN)), GUD Holdings ((GUD)), Sonic Healthcare, and Domino's Pizza ((DMP)).

Companies identified for likely negative surprises this February reporting season include CommBank ((CBA)), Monadelphous ((MND)), Mineral Resources ((MIN)), and Temple & Webster ((TPW)).

Analysts at UBS have identified their own candidates for likely surprises in either direction.

For a positive surprise, UBS has selected Imdex ((IMD)), Suncorp Group ((SUN)), IDP Education ((IEL)), Computershare ((CPU)), ASX Ltd ((ASX)), Origin Energy, Challenger ((CGF)), Domain Holdings Australia ((DHG)), QBE Insurance ((QBE)), Reliance Worldwide, Steadfast Group ((SDF)), and Perpetual ((PPT)).

For a negative surprise, UBS's focus is on AMP Ltd ((AMP)), Insurance Australia Group ((IAG)), Wesfarmers ((WES)), Magellan Financial Group ((MFG)), Coles Group ((COL)), Domino's Pizza, Platinum Asset Management ((PTM)), Southern Cross Media ((SXL)), and Adbri ((ABC)).

Insurance and diversified financials analysts at UBS are anticipating good results from QBE Insurance, Suncorp Group, Computershare, ASX, Pexa Group, Challenger, Steadfast Group, and Perpetual. Suspected disappointments are to come from Insurance Australia Group, AMP, Magellan Financial Group and from Platinum Asset Management.

Colleagues at Credit Suisse equally believe the bias is for more negative surprise from Platinum Asset Management, while seeing potential surprise coming from ASX, Link Group ((LNK)), Janus Henderson ((JHG)), and Perpetual.

Credit Suisse also sees upside risks for QBE Insurance, Steadfast Group, Medibank Private ((MPL)), and Insurance Australia Group while downside risks are reserved for Suncorp Group and nib Holdings ((NHF)).

The aforementioned technology analysts at RBC Capital see downside risks for Altium ((ALU)) and Appen ((APX)) this season while Pro Medicus ((PME)) and Fineos Corp ((FCL)) should be among the best protected in the sector due to long-term contracts and minimal churn.

At stockbroker Morgans, market strategists have identified a number of key tactical trades into results, including HealthCo Healthcare and Wellness REIT ((HCW)), Hub24 ((HUB)), Lovisa Holdings ((LOV)), Megaport, People Infrastructure, nowadays trading as Peoplein ((PPE)), Seek, and Sonic Healthcare.

Morgans had also identified Ansell, but that idea went flat because of a profit warning ahead of the interim results release, as well as Credit Corp ((CCP)), which delivered but its share price not so much.

Conviction Calls

Discretionary retail analysts at Goldman Sachs suspect investors will be best off by seeking out investment ideas with strong valuation support this season.

Their three Buy-rated ideas are Adairs ((ADH)), Super Retail ((SUL)), and Harvey Norman ((HVN)).

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Market strategists at Banyantree have selected a2 Milk ((A2M)), Beach Energy ((BPT)), Cleanaway Waste Management ((CWY)), IDP Education, NextDC, Nitro Software ((NTO)), REA Group, and Tabcorp Holdings ((TAH)) as their Top Picks for 2022.

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RBC Capital's technology sector favourites are Pro Medicus, Fineos, EML Payments ((EML)), and Megaport ((MP1)).

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Stockbroker Morgans has added 10 additional names to its (already extensive) list of Best Ideas in Australia for the year ahead.

Those 10 newcomers are Atomos ((AMS)), Beacon Lighting ((BLX)), Maas Group ((MGH)), Newcrest Mining ((NCM)), Pro Medicus, Red 5 ((RED)), Seek, South32 ((S32)), Webjet ((WEB)), and Wesfarmers.

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Morgans also identified four companies it believes offer "compelling value": Acrow Formwork and Construction Services ((ACF)), People Infrastructure, now Peoplein, Superloop ((SLC)), and Generation Development ((GDG)).

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Software analysts at Shaw and Partners believe they have found a new gem in the sector; Keypath Education International ((KED)) with the shares trading some -60% below the price target set by Macquarie on February 1.

Sector Top Picks, according to the team, remain Mach7 Technologies ((M7T)), Whispir ((WSP)) and Gentrack Group ((GTK)).

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Small cap specialists at JP Morgan continue to nominate Tyro Payments ((TYR)) as their Top Pick, while Flight Centre ((FLT)) remains least preferred ("Bottom Pick").

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Wilsons' Top Picks for 2022 consists of 19 names; ARB Corp ((ARB)), Aroa Biosurgery ((ARX)), City Chic Collective ((CCX)), Collins Foods ((CFK)), CSL ((CSL)), EML Payments, GUD Holdings, Immutep ((IMM)), ImpediMed ((IPD)), NextDC, Nick Scali, Plenti ((PLT)), ReadyTech ((RDY)), Ridley Corp ((RIC)), Silk Laser ((SLA)), Telix Pharmaceuticals ((TLX)), Tyro Payments, Whispir, and Xero ((XRO)).

February Reporting Season – Predictions & Forecasts

Two healthcare companies that are likely to report bumper results this month without getting rewarded for it, according to analysts at Jarden, are Healius ((HLS)) and Sonic Healthcare ((SHL)).

Both lab-owners have been enjoying extraordinary testing volumes due to the global pandemic, but any normalisation from here onwards should have a pronounced impact, at least on that particular part of the respective businesses.

Jarden thus believes investors are less interested in how well both companies have done out of significant volumes in PCR tests. The focus is now firmly on: how long still? Plus: how quickly will yesterday's boost dissipate?

The mere anticipation of lower testing volumes has already led to a downgrade in future profit forecasts by double digit percentages for the years ahead. Jarden also believes the market is switching away from covid-beneficiaries in favour of recovery trade opportunities.

Jarden rates Sonic Healthcare Neutral with a $37.18 price target while Healius has been downgraded to Neutral despite Jarden's price target of $5.57 indicating significant upside.

The broker is self-confident of the contradiction and explains it with a reference to the abovementioned switch on the back of changing earnings profiles. Market sentiment, indeed, can be all-overarching, until it's no longer.

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Rising real yields, whereby inflation adjusted yields are marked against listed government bonds, have shifted the market's focus to free cash flows and dividends, report analysts at Macquarie.

The suggestion made is that it is no longer sufficient to simply compare sales and earnings per share with analysts forecasts. From here onwards the level of free cash flows and dividend paid are carrying the label of most important items.

Within this framework, Macquarie observes about half of all industrial and resources companies that have reported up until Friday disappointed at the cash flow level, with the likes of Bapcor ((BAP)), Amcor ((AMC)), Cimic Group ((CIM)), Imdex ((IMD)) and GUD Holdings ((GUD)) not meeting free cash flow estimates.

Thus far, Mineral Resources ((MIN)) delivered one of the largest "misses" this season, and this includes the cash flow measure.

UBS strategist Richard Schellbach, on the other hand, observes corporate Australia, thus far, has surprised through resilient margins and indications of healthy growth in operations with supply chain bottlenecks dissolving, but the challenge to find and hire new staff remains.

Many companies have been reporting a noticeable uptick in their operations in the new calendar year, observes the UBS strategist. While these are all positives, the ability to restrain cost growth remains key with most disappointments caused by higher cost growth.

This time around, the banks live on the positive side of the ledger with CommBank ((CBA)) and National Australia Bank ((NAB)) in particular showing off a performance much better than market forecasts.

Keeping a lid on costs was only one ingredient in the mix. When it comes to awarding the gold medal, it is clear NAB's quarterly result was the best among peers. Some analyst reports post the release are using the term "impressive".

Analysts at JP Morgan/Ord Minnett will have their eyes peeled over financial results released by Telstra ((TLS)) and TPG Telecom ((TPG)) this season as recent updates by NBN Co indicate the local telecom sector is battling wholesale cost inflation in fixed consumer divisions.

Telecom colleagues at Credit Suisse have once again expressed their sector preference for Telstra, with Credit Suisse seeing potential for a higher dividend by FY24 (17c) and with the telco now reporting InfraCo Fixed as a separate unit.

At the smaller end, the broker highlights Aussie Broadband ((ABB)) as attractive post recent de-rating.

JP Morgan, however, remains of the view the telecom industry today is all about asset sales tomorrow.

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Mining services analysts at Jarden believe the biggest risk/reward potential this month resides with Emeco Holdings ((EHL)), followed by MacMahon Holdings ((MAH)), NRW Holdings ((NWH)), and only then the former star-performer in the sector, Monadelphous ((MND)).

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Macquarie sees downside risk to expectations for healthcare stocks Ramsay Health Care ((RHC)), Cochlear ((COH)) and both aged care service providers Estia Health ((EHE)) and Regis Healthcare ((REG)).

Positive risk (upside potential) has been attached to Sonic Healthcare's and CSL's ((CSL)) results releases.

Colleagues at the Technology desk are preparing for disappointing results this season; the broker reports its own aggregate forecasts for revenue and operational earnings (EBITDA) are positioned -5%-7% below market consensus. The largest gap between Macquarie's forecasts and consensus seems to be reserved for Appen ((APX)) and NextDC ((NXT)).

Macquarie holds Outperform ratings on both Megaport ((MP1)) and NextDC. While the former has already reported, Macquarie is cautious towards NextDC ahead of the upcoming result. But the broker remains positive regarding NextDC's longer-term growth potential.

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Real estate analysts at Citi suspect Charter Hall ((CHC)) might deliver a positive surprise this season, while Scentre Group ((SCG)) has been singled out for potential disappointment.

Conviction Calls

The duo of ASX software aficionados at Shaw and Partners has added Elmo Software ((ELO)) to the broker's list of sector Top Picks.

The other four names on the sector Top Picks list are Mach7 Technologies ((M7T)), Whispir ((WSP)), Gentrack Group ((GTK)), and Keypath Education International ((KED)).

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Analysts at Jarden covering consumer spending oriented companies recently expressed their positive view for Metcash ((MTS)), Lynch Group ((LGL)), Beacon Lighting ((BLX)), Woolworths ((WOW)), Adairs ((ADH)) and Kathmandu ((KMD)).

The team holds a negative view for JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Endeavour Group ((EDV)), and Super Retail ((SUL)).

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Macquarie's healthcare sector favourites are CSL, ResMed ((RMD)), Healius, Virtus Health ((VRT)), and Monash IVF Group ((MVF)).

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The Star Entertainment Group ((SGR)) remains Goldman Sachs' sector favourite among local gaming companies.

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Morgan Stanley's Australia Macro+ Focus List currently consists of the following ten: ANZ Bank ((ANZ)), Santos ((STO)), Computershare ((CPU)), Goodman Group ((GMG)), Macquarie Group ((MQG)), Orica ((ORI)), Qantas ((QAN)), QBE Insurance ((QBE)), REA Group ((REA)), and Telstra ((TLS)).

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Wilsons' Conviction Calls now include plus-size omni-channel fashion retailer City Chic ((CCX)), alongside ARB Corp ((ARB)), Collins Foods ((CFK)), Aroa Biosurgey ((ARX)), Immutep ((IMM)), ReadyTech ((RDY)), and Plenti ((PLT)).

More Beats Than Misses

As I write this week's Weekly Insights on Monday, the FNArena Corporate Results Monitor shows the financial results from 120 ASX-listed companies have been reported and reviewed thus far. By the beginning of March, next week, this number will have risen to just under 350.

It is dangerous to draw conclusions when we only have a little more than one third of data available, and history suggests many more misses will be coming out of the woodwork during the final days of the season, but some of the early trends that are appearing are worth paying attention to.

First up, while circa two-thirds of company results are still absent from the Monitor, those companies that have already reported represent more than two-thirds of the ASX's total market capitalisation. Let's not forget the re-unified BHP Group ((BHP)) has an index weighting of 10%-11% these days.

Early observations

Corporate Australia is displaying a lot more resilience than it's generally been given credit for. Despite broad discomfort with how companies might be performing amidst numerous challenges, including covid-impacts and inflationary pressures, the general impression after three weeks of public admissions is that companies are prepared and coping better than expected.

This is important as corporate results are all about market expectations beforehand and after the release of detailed financials. So far, earnings forecasts have -on balance- regained upward momentum, which is quite rare. Reporting seasons usually reduce earnings forecasts in a broad, general sense. February 2022's exception thus far is both a reflection of corporate resilience and analysts having built in too much caution in their estimates.

Putting things in perspective: FY22 market consensus has EPS growth at circa 13%, while for FY23 that number is only 3%. Things can change dramatically for energy and materials producers as most spot prices are above analysts forecasts, in some cases: well-above forecasts.

We can but wonder what the daily price action would have looked like if not for macro-influences exerted by rising bond yields, inflation data surprising on the upside, and investors opting for a risk-off attitude, with general caution heightened by the prospect of military escalation between Russia and the West.

Lower share prices in a general sense also means the average Price-Earnings (PE) multiple for the Australian share market is now below 17x from above 20x in early 2020. Again, one needs to take into account that doubling the weight of BHP, trading on a FY22 currency-adjusted PE below 10x, in itself has made a big impact on the general calculation for the market as a whole.

The debate about share market valuation is not going to die anytime soon!

Historical analysis by Morgan Stanley suggests February is the season when corporate Australia is most likely to beat market forecasts. February last year saw more than 50% of companies beating EPS forecasts, on Morgan Stanley's assessment, and before that February 2017 also generated EPS beats well-above average.

Thus far this month, the percentage of EPS "beats" is running above 50%, but the number is more impressive at the top line as more companies to date have reported better revenues than those who've met forecasts. It's similar when looking at declared dividends.

On FNArena's holistic assessment, as at Monday morning, 52.5% of reporting companies delivered a "beat" (63 companies) while 30.8% reported in-line (37 companies) and only 20 companies (16.7%) missed the mark. Our own numbers confirm Morgan Stanley's observation with February 2021 the best results season to date (post the Monitor's introduction in 2013), ending with 47% beats and only 13% misses.

The sole reporting season that managed to record total beats above 50%, on FNArena's account, has been the season in between August last year and this February. But that's a tally of 49 companies only, and many have a specific, non-representative natured business compared with the rest of the ASX.

The overwhelmingly positive numbers on profits, sales and dividends -what most investors pay attention to- are somewhat being tempered by many companies reporting weaker free cash flow numbers, points out Macquarie. On the broker's analysis, misses on free cash flow are coming predominantly from large industrial companies and from the resources sector.

Macquarie draws a direct correlation with margin pressures and shrinking capex intentions, while also fewer buybacks and special dividends have been announced to date. The positive trend in profit forecasts is directly connected with large cap resources companies, explains Macquarie, with each of Woodside Petroleum ((WPL)), Evolution Mining ((EVN), BHP Group, Newcrest Mining ((NCM)) and Santos ((STO)) suggesting their pricing power and operational resilience is greater than for smaller cap peers.

Market responses are a lot more difficult to read this month, as macro plays a dominant role on most trading days, but Macquarie is still confident enough to posit that companies beating on cash flow and/or dividends are more likely to see their shares outperform, while others lag.

Analysts at UBS already spotted enough evidence to conclude inflation bottlenecks are starting to ease. This fits in nicely with Macquarie strategists' view that "The growth cycle is still slowing, so stay low risk. As noted [previously], we still think we are close to the end of the yield spike as focus may soon shift to weaker growth."

The First 120 Results

Macro-impacts or not, investor preferences lay with share market laggards that are, at best, fairly valued with low expectations to beat (or at the very least: not to miss dramatically).

Best share price performances over the past three weeks have thus come from the likes of NRW Holdings ((NWH)), Treasury Wine Estates ((TWE)), Sims ((SGM)), Vicinity Centres ((VCX)), Challenger ((CGF)), Pact Group Holdings ((PGH)), Nearmap ((NEA)) and Magellan Financial Group ((MFG)).

If we take the same thematic a little broader, we can also include CSL ((CSL)), Seek ((SEK)) and JB Hi-Fi ((JBH)) – historically solid performers whose potential performance this time around had been clouded by lots of questions and doubt beforehand.

And, as expected given the general set-up and jittery investor nerves, the market is in absolutely no mood to take prisoners in case of disappointment. See double-digit punishments for Super Retail ((SUL)), for Mineral Resources ((MIN)) and for Netwealth Group ((NWL)), and equally harsh treatments for Wesfarmers ((WES)), for Telstra ((TLS)), for Cimic Group ((CIM)), for Domain Holdings ((DHG)), for EML Payments ((EML)), and numerous others.

Companies having suffered noticeably large downgrades to forecasts include Ansell ((ANN)), Star Entertainment ((SGR)), GPT Group ((GPT)), Origin Energy ((ORG)), and Wesfarmers ((WES)).

Equally important, as successful investing is all about looking forward and distinguishing short-term noise from longer-term fundamentals and growth prospects, this reporting season is building a list of companies whose share price would have been richly rewarded if only general sentiment and focus had not been so strictly on rising bond yields.

Companies that deserve to be included on that list are Baby Bunting ((BBN)), Breville Group ((BRG)), Centuria Industrial REIT ((CIP)), Goodman Group ((GMG)), IDP Education ((IEL)), Pro Medicus ((PME)), REA Group ((REA)), ReadyTech Holdings ((RDY)), Seek, and Temple & Webster ((TPW)).

Due to the many factors impacting this year, and the unforgiving attitude in case of a misstep, it's inevitable a well-diversified investment portfolio will be hit by large sell-offs throughout this season. There is only so much that can be forecast and anticipated.

For investors, the task at hand is to assess whether investment theses remain intact, irrespective of share price action, and when and where cash on the sidelines should be re-allocated for the maximum, longer-term return.

Latest Update

By the time I am ready to wrap up this week's assessment, later on Monday, the numbers for FNArena's Corporate Results Monitor have changed, though not in a dramatic way.

The total tally of companies has now risen to 131, of which 69 (52.7%) have beaten, 40 (30.5%) have met and 22 (16.8%) have missed forecasts.

One of the stand-out developments this season is that the unusually large number in beats, and the positive trend in earnings and dividends have not been met with further increases in valuations and price targets. As things stand on Monday afternoon, it looks like February this year will not generate much in terms of additional upside.

Thus far, only two reporting seasons have ended with a net negative aggregate balance for price targets; February 2019 and March-July 2020. As we are all aware by now, it's an extremely bifurcated market that's hiding behind those data.

Too Many Distractions From Corporate Results

Consumer-related companies and retailers have been at the centre of the February reporting season in Australia; mostly not in a favourable manner -at least not in share price performance terms.

This turned out the ideal background for cheap-bling retailer Lovisa Holdings ((LOV)) to show not all retailers are made of the same ilk, and not all are struggling to contain costs, retain staff and re-connect with customers.

Lovisa's 59% jump in earnings throughout the six months ending in December simply pulverised analysts' forecasts with stockbroker Morgans stating the performance was "nothing short of remarkable". This, the broker continued in its response the following day, is potentially one of the biggest success stories in Australian retail.

At least that is the prospect. Lovisa obviously has found and developed a formula that is appealing to younger women who don't want, or cannot afford, expensive Bulgari or Harry Winston, and who keep revisiting its stores. Retailers like Lovisa live and die by rolling out ever more stores, and this implies adding new geographies.

Are India and China on management's radar? Market speculation says yes. The potential growth path ahead if Lovisa were to successfully enter those mega-markets… it's almost beyond imagination. It would definitely vindicate Morgans' grand enthusiasm. Premier Investments' Smiggle squared, or something similar.

In the short term, throughout the fog of war and all the extra macro-considerations that have been weighing on share prices these past few weeks, analysts have raised their forecasts, bumped up their valuations and kept their ratings overwhelmingly on Buy, or equivalent.

And investors have pushed the share price higher on every day following the interim results release.

Lovisa is not an overnight discovery. Since listing in late 2014, the share price has been in a steady up-trend, albeit with at times heavy volatility along the way, typical for retailers but also typical for a heavily polarised market that repeatedly seeks to switch momentum in favour of cheaper-priced 'value' stocks.

In case there was any doubt, Lovisa is very much a growth stock, and its dividend yield and Price-Earnings (PE) multiples are very much reflective of this. The share price is now well off the level seen before the interim result release last week, but also still well below last year's all-time record high and the consensus price target (both not too dissimilar at $23 and $22.64 respectively).

And herein lays the investor dilemma in 2022: should we take guidance from macro considerations such as bond yields, rising inflation, central banks winding back stimulus, Russia upsetting the world with tanks and bombs, and/or the prospect for slowing global growth, or should we simply stick with concentrating on solid and resilient corporate growth stories such as Lovisa?

It's a tough one, because for every Lovisa that is out there, there is a much larger number of companies that simply cannot match this. Plus it's much easier to spot the difference in hindsight.

Consumer-oriented companies needed to find a solution to supply-chain bottlenecks and they built up their inventories in response, but this has a negative impact on cash flows and margins, maybe even on profits and the market has responded with savage sell-offs.

From Accent Group ((AX1)) to Temple & Webster ((TPW)), with in between Adairs ((ADH)), Adore Beauty ((ABY)), Baby Bunting ((BBN)), City Chic Collective ((CCX)), Super Retail ((SUL)) and numerous others; all have received the harsh treatment in February.

Granted, it wasn't always simply because of the built-up inventories, and the outlook for the sector is very much aligned with consumers' willingness, and ability, to spend. Having said this, the past decade (plus some) has shown time and again it's best not to lose confidence in a well-run retailer such as JB Hi-Fi ((JBH)) – just ask the shorts that get burned every single reporting season, including this year after management pre-guided financial numbers in January.

While JB Hi-Fi shares have been extremely profitable for loyal shareholders up until mid-2020, they have effectively gone nowhere since with lots of volatility before and after, further highlighting the challenges for investors this year.

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Another stellar performer that has proved the doubters wrong this past season is platform operator Hub24 ((HUB)), having been sold down hard first after competitor Netwealth ((NWL)) released a disappointing update.

But Hub24 is not one-on-one comparable with Netwealth or any of the smaller players in the world of financial platforms, as also proven by its interim report two weeks ago.

Similar to the discretionary retailers mentioned earlier, share prices for the likes of Hub24 can be extremely volatile under adversarial circumstances. Hub24 shares reached an all-time record high of $34 in mid-October last year. Earlier this month, on Netwealth-sympathy, the shares sank to close to $22.

Even though the interim report has relegated short-term doubts into the background, the rally post-results still hasn't pushed the share price beyond the level at the start of the fresh calendar year.

Assuming the exodus in investor funds from large managed funds (such as the ex-bank funds and AMP) continues for longer, and many predict it will, platforms such as Hub24 continue to operate from a sweet spot with new funds flowing in day after day, month after month, year after year.

And after years of eating away at the shrinking customer base of the big players in the domestic market, total market share for challengers such as Hub24 and Netwealth is still small, hence why there could be so much more growth on the horizon.

The number one problem for a company like Hub24 is that it is carrying the label of 'technology'.

I would argue it is a financial, if anything, with funds under administration one of its key financial metrics, but few of those who stand ready to sell more shares whenever technology falls out of favour yet again would agree with me (the market runs on broad generalisations; details come much later in focus).

The second key problem is that share indices are below starting points for the year, and many hold negative views about the outlook for equities, in particular if high inflation stays around and bond yields need to rise higher.

The two factors have large overlap, but as long as both remain in question, I sense there will be a limit as to how high Hub24 shares can rally, irrespective of how good its financial performance turns out to be.

Note: Hub24 shares are held by the FNArena/Vested Equities All-Weather Model Portfolio.

Similar to the example of Lovisa Holdings, it would not have been easy for investors to pick the winners out of the local technology sector in February. Computershare ((CPU)) -also a 'financial' at heart- is everybody's friend when interest rates are believed to be on the rise, but otherwise it has been slim pickings in February.

The story for many of the positive performers throughout the month, including Macquarie Telecom ((MAQ)), NextDC ((NXT)), and WiseTech Global ((WTC)) to name a few, looks rather similar. Post solid results shares have bounced, but they had sold down quite heavily beforehand.

For these shares to close the gap with price targets we need to see more clarity about the prospects for inflation, bond yields and central bank tightening. War in the Ukraine might already have changed the trajectory for each, but we don't know this for certain just yet.

It likely means current shareholders might need to remain hopeful and patient for longer, while those investors looking to get on board still have plenty of time and opportunity at hand.

At the opposite end of the sector's ledger, the punishments have been almost extraordinary in case of disappointment. Granted, investors should have asked questions much earlier about Damstra Holdings ((DTC)) as this month was far from the first time management surprised on the downside or missed market expectations.

This may yet turn out another example of buying questionable acquisitions that do not turn into diamond assets once under different management.

Some odd behaviour was on display from management at Appen ((APX)) with the company no longer providing annual guidance, instead putting forward some lofty ambitions years into the future.

If finance were more commonly integrated in everyday society, this would be the subject of many jokes during stand-up comedy nights at the local pub, but alas, we'll have to stick to making jokes among investors instead.

If a company no longer provides guidance, it automatically can no longer miss that guidance at the end of the financial year.

The absence of guidance was not taken lightly for Life360 ((360)), while Megaport ((MP1)) got punished for increasing investment while there is no prospect for turning profitable soon. Fineos Corp ((FCL)) continues to suffer from IT hesitancy among insurers globally.

Analysts feel Bigtincan ((BTH)) has been unfairly treated, but my focus remains with the likes of IDP Education ((IEL)), REA Group ((REA)), and Seek ((SEK)) – all stocks of which I am convinced would be trading at higher levels today if not for macro-considerations.

In general terms, and investors should take this on board as the new gospel, post the easy momentum ride of the years past, the market will be paying close attention to cash flows and progress towards turning net cash flow positive from here onwards.

This means technology companies must show more than simply a promising marketing folder; it's now about Show Us The Money.

This is a positive development; it means the wheat will be separated from the chaff; true quality will be rewarded, while low quality on empty promises will be left to the day traders and high-risk gamblers.

It's good to know one's own preference and strategy. I am with the quality seekers. I happily leave Damstra, and Appen, and Bravura Solutions ((BVS)), and EML Payments ((EML)), and Kogan ((KGN)), and Limeade ((LME)), and Nanosonics ((NAN)), and Nearmap ((NEA)), and Nuix ((NXL)), and Reckon ((RKN)), and Redbubble ((RBL)), and Superloop ((SLC)), etc far away from my personal attention.

Not that none of these companies has any chance of becoming a success story in the future, but at this point in time the risks are too high and that lack of certainty will reveal itself.

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Among the companies that confirmed the solidity of their business and its outlook in February I would include Aussie Broadband ((ABB)), ARB Corp ((ARB)), Breville Group ((BRG)), Charter Hall ((CHC)), CSL ((CSL)), Ebos Group ((EBO)), Goodman Group ((GMG)), Pro Medicus ((PME)), ResMed ((RMD)), Seek, WiseTech Global, and Woolworths ((WOW)).

There are no cyclicals in that list, as the cycle can still turn later this year, and it's outside of control for individual companies.

Companies that are steadily building a track record of disappointment include Ainsworth Game Technology ((AGI)), Blackmores ((BKL)), Bravura Solutions, BWX Ltd ((BWX)), Crown Resorts ((CWN)), Inghams Group ((ING)), Kogan, Lendlease ((LLC)), Nuix, and Wagners ((WGN)).

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In terms of the February reporting season statistics; the numbers look absolutely fantastic – at face value.

The FNArena Corporate Results Monitor has finished the month with 342 reporting companies in its tally, of which 148 (43.3%) "beat", 125 (36.5%) met expectations and only 69 (20.2%) "missed".

This makes February 2022 the second best February season behind February last year in the history of our Monitor (going back to August 2013).

Further adding to the underlying positive picture is that EPS forecasts on average have improved throughout the month, whereas historically forecasts tend to decrease during reporting season. This time around banks and resources, large caps, have been the noticeable outperformers, with the energy sector the stand-out on a big rise in prices for crude oil and gas.

UBS strategist Richard Schellbach makes the point the media sector, both traditional and online, has proved itself as a great barometer of economic strength this season.

Supply chains, labour constraints, and otherwise rising costs turned up as most cited headwinds for companies who proved much more savvy and resilient than analysts had given them credit for in managing costs and margins.

But while all that is good news, even bordering on the fantastic, there is one negative statistic that stands out like a sore thumb, and it is a negative one:

The average price target in February has fallen by -2.27%. In aggregate, total price targets combined for the 342 companies covered fell by -1.56%. These are the worst numbers since August-2013, indicating how a change in the macro-picture (inflation, bond yields) has weighed upon stock valuations this month.

More positive news came through via dividends, with further recovery in bank dividends and ongoing strength for iron ore producers in particular pushing total dividends paid out in Australia to new highs, once again beating expectations.

A fact that hasn't been emphasised elsewhere, on my observation, is that BHP Group ((BHP)) has now become the highest dividend payer in the world, and the company paid out another record half-yearly dividend in February – go figure.

On Janus Henderson's statistics, Australian investors have absolutely no reason to complain when it comes to receiving dividends from listed companies with BHP now sitting on top of the world's ranking, while Rio Tinto ((RIO)) sits on spot number three (Microsoft sits in between on number two) and with Fortescue Metals ((FMG)) on spot number ten.

Strong mining and recovering banks pushed up total dividends to a new record high in 2021, reports Janus Henderson, to reach $87.1bn. Globally, total dividends totalled US$1.47trn, and they are projected to rise to US$1.52trn by year-end.

FNArena's Monitor will be fine tuned over the days ahead as analysts catch-up on omissions and delays during the month, but only minor changes should occur from the numbers mentioned.

Conviction Calls & Post-Reporting Season Notes

Analysts at JP Morgan found February 2022 an uncharacteristically positive reporting season, with "beats" surging to an all-time high on their assessment (FNArena's assessment is slightly different, but we share the positive undercurrent – see also https://www.fnarena.com/index.php/2022/03/07/february-2022-result-season-the-wrap/).

JP Morgan believes staples and REITs crowned themselves local champions in February, generating the most "beats". Nominated as stand-out performers: Coles ((COL)), Woolworths ((WOW)), Charter Hall ((CHC)), Goodman Group ((GMG)), and Dexus ((DXS)).

EPS growth for FY22 has now risen to 13.6%.

The main disappointment, on JP Morgan's numbers, came through via revisions to dividend guidance and projections.

Ironically, when it comes to operational performances, the energy sector was the stand-out underperformer. Luckily, the sector continues to be carried by rising oil and gas prices.

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Small and medium cap analysts at Goldman Sachs have revised their forecasts and preferences, including a general assessment of how rising inflation is having an impact across the broker's research universe.

The exercise has led Goldman Sachs to yet again express its preference for long-term structural growth opportunities, while equally directing focus towards strong balance sheets and valuation support.

A few points made by the team:

-food suppliers and discount retailers with long-term fixed price contracts will face margin pressure as they are limited into how much input-inflation can be passed on
-land-lease and retail-e-commerce businesses with strong end market demand should have the greatest ability to pass on cost increases

Preferred businesses thus include: Lifestyle Communities ((LIC)), Temple & Webster ((TPW)), Hipages Group ((HPG)), Omni Bridgeway ((OBL)), APM Human Services International ((APM)), Super Retail ((SUL)), Elders ((ELD)) while other Buy-rated stocks get a mentioning too: Redbubble ((RBL)), Adairs ((ADH)), Costa Group ((CGC)), IDP Education ((IEL)), and Johns Lyng Group ((JLG)).

Equally important, possibly, is that the following three stocks have now been downgraded to a Sell: Inghams Group ((ING)), Blackmores ((BKL)), and The Reject Shop ((TRS)).

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Macquarie spotted plenty of positives from media, telecom and technology companies throughout the February reporting season. Traditional media operators now have a strong balance sheet, observes the broker, with M&A or share buybacks expected to become positive catalysts for share prices for both Nine Entertainment ((NEC)) and Seven West Media ((SWM)).

Macquarie's TMT key favourites are Seek ((SEK)), TPG Telecom ((TPG)) and News Corp ((NWS)), with Seven West Media most preferred among smaller cap "emerging leaders".

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A few observations published following a deep dive into the local technology sector by analysts at Wilsons:

-Companies where share prices are arguably not properly reflecting their meaningful organic growth profiles (though there may be company-specific reasons for this, the broker adds): Whispir ((WSP)), Xero ((XRO)), Elmo Software ((ELO)), and Nitro Software ((NTO)).

-Shares prices that reflect strong cashflow, earnings growth, and limited impacts to revenue growth over the last two years; NextDC ((NXT)), ReadyTech Holdings ((RDY)), and TechnologyOne ((TNE)).

-Share prices that have contracted heavily in response to disruptions to core underlying markets; Bravura Solutions ((BVS)), Appen ((APX)), and Damstra Holdings ((DTC)).

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Bell Potter's tech analysts Chris Savage and Sam Brandwood have left their sector preferences with Infomedia ((IFM)), TechnologyOne, and Life360 ((360)).

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Analysts at Credit Suisse have used the February performances to reiterate their diversified financials number one preference for Computershare ((CPU)). Potentially even more eyebrow raising is the fact Credit Suisse has become universally positive on local owners and operators of financial platforms with all of Insignia Financial ((IFL)), Hub24 ((HUB)) and Netwealth ((NWL)) now rated Outperform.

Despite asset managers looking "cheap" and trading at deep discounts to their intrinsic valuations, Credit Suisse simply cannot get excited about this sector at this point in time. Credit Suisse foresees further outflows and mark-to-market downgrades. Only two asset managers are currently Outperform-rated; Perpetual ((PPT)) and Pendal Group ((PDL)).

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Strategists at stockbroker Morgans found the February reporting season "frustrating"; despite excellent stats and results, most share prices could not muster a sustainable gain.

The broker does believe investors will continue to be rewarded for investing in quality, "which includes mid-to-small cap stocks caught up in macro volatility". Best Ideas from the reporting season include Santos ((STO)), Treasury Wine Estates ((TWE)), Cochlear ((COH)), Lovisa Holdings ((LOV)), Seek, Corporate Travel Management ((CTD)), NextDC, Baby Bunting ((BBY)), Hub24, and GQG Partners ((GQG)).

Morgans' list of Best Ideas among Aussie stocks has now accumulated to 52 inclusions with Challenger ((CGF)), Cochlear, GQG Partners, Healius ((HLS)), Baby Bunting, Ramelius Resources ((RMS)), Dexus Industrial REIT ((DXI)), and IDP Education now added to the list.

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US strategists at Citi believe bond yields have done their dough for now, implying the brisk de-rating for Growth stocks in 2022 ends here and now.

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Tech-sector analysts at Goldman Sachs have reiterated their Buy calls for Megaport ((MP1)), Nitro Software, REA Group ((REA)), and Xero.

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Macquarie has returned from the February reporting season with a renewed focus on the re-opening trade, nominating the likes of Qantas ((QAN)), Transurban ((TCL)), Star Entertainment ((SGR)), Dexus ((DXS)), and CSL ((CSL)).

Companies that in February were able to raise guidance and are seen as well-positioned for the months ahead include Charter Hall, Seek, James Hardie ((JHX)), Steadfast Group ((SDF)), NextDC, and Computershare.

As reported previously, the prospect of economies slowing and the Fed set for rate hikes keeps Macquarie more defensive in portfolio allocations. (Think Coles ((COL)) and CSL).

Macquarie's more defensive bias also rules its preferences among engineers and contractors making Ventia Services Group ((VNT)) its current sector favourite.

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At Wilsons, healthcare analysts have nominated their three best sector results in February: Capitol Health ((CAJ)), CSL, Silk Laser Australia ((SLA)).

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Retail analysts at Jarden are more positive on companies with pricing power, such as Metcash ((MTS)), Woolworths, Coles, Treasury Wine Estates and Costa Group, category killers (Super Retail) and beneficiaries of a global reopening (Treasury Wine, Super Retail, Accent Group ((AX1)) and Universal Store Holdings ((UNI)).

Retailers that are currently rated Underweight include JB Hi-Fi ((JBH)), Harvey Norman ((HVN)) and Endeavour Group ((EDV)).

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Healthcare analysts at Macquarie believe the sector mostly reported in-line throughout February, while showcasing it is in good health (pun intended).

Positive surprises were noted from CSL and Cochlear, while Ramsay Health Care ((RHC)) upped costs guidance (negative).

Preferred sector exposures are CSL, ResMed ((RMD)), Healius, Integral Diagnostics ((IDX)), and Monash IVF Group ((MVF)).

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Healthcare analysts at Credit Suisse believe the sector managed to surprise on the upside, with the key exception of Ansell ((ANN)).

Credit Suisse's sector picks are ResMed, Cochlear, Ebos Group ((EBO)), and APM Human Services International.

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Small cap specialists at JP Morgan still very much prefer Iress ((IRE)) -their Top Pick- but not Flight Centre ((FLT)), their Bottom Pick.

Conviction Calls & (More) Post-Reporting Season Notes

Portfolio managers at stockbroker Morgans remain happy to be 100% invested in this market, though they make a point that the focus is on potentially further upgrading the quality of the portfolio, while a defensive bias is seen as a positive in the present environment.

Companies in the Core Model Portfolio believed to offer a defensive earnings profile include Transurban ((TCL)) and APA Group ((APA)).

The broker's Growth Model Portfolio has seen a number of changes recently. Shares in TPG Telecom ((TPG)) were sold. Holdings in GQG Partners ((GQG)), Aristocrat Leisure ((ALL)) and Reliance Worldwide ((RWC)) have all been increased.

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Strategists at UBS do not see true stagflation on the horizon, but they nevertheless believe investors should be prepared and at the very least know what works best in case we do end up with stagflation later in the year or in 2023.

Their historic data analysis found industries that outperformed through stagflationary pressures, pretty much in a consistent way across regions, are Staples, Healthcare, and Real Estate.

Sectors that underperformed in Stagflation differed significantly across regions. Technology suffered the most in the US, Financials in Europe, while in Emerging Markets it was Materials and Energy. I think Australia would naturally be linked-in with the latter.

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For those investors looking to play the momentum for resource stocks on the ASX, Macquarie's favourites are Mineral Resources ((MIN)), Iluka Resources ((ILU)) and Coronado Global Resources ((CRN)) among bulk miners, Pilbara Minerals ((PLS)) for lithium, Sandfire Resources ((SFR)) for exposure to copper, Panoramic Resources ((PAN)) for nickel, and Chalice Mining ((CHN)) among exploration plays.

Macquarie also most prefers Northern Star Resources ((NST)) among local producers, as well as Silver Lake Resources ((SLR)) and Bellevue Gold ((BGL)).

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Damien Boey, Chief Macro Strategist, Barrenjoey: "We remain concerned about slowdown risks. Within equities, we think that there is more defensiveness in quality than there is in value at this juncture given that multiple dispersion has come off significantly in the past few months and given that value exposures typically have significant financial and operational leverage to the cycle."

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Post the February reporting season, Ord Minnett has reshuffled its preferences among Australia's retailers. Most preferred are now JB Hi-Fi ((JBH)) and Premier Investments ((PMV)) -due to superior online capabilities- followed by Metcash ((MTS)) and Super Retail ((SUL)).

Least liked are Coles ((COL)) and Harvey Norman ((HVN)).

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Consumer sector colleague analysts at Macquarie, however, have adopted a different angle. They are concerned on the outlook for inflation in Australia and the corresponding upward pressure on interest rates.

Macquarie, thus, has a preference for Staples, with low PE staples like Coles and Metcash preferred over higher PE staples like Woolworths ((WOW)) and Endeavour Group ((EDV)). Within Discretionary retail Macquarie again prefers low PE consumer names of JB Hi-Fi and Harvey Norman over higher PE names such as Wesfarmers ((WES)).

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Ord Minnett also nominated what it thought were the stand-out financial results from the February reporting season: Aussie Broadband ((ABB)), CSL ((CSL)), BHP Group ((BHP)), Breville Group ((BRG)), Cleanaway Waste Management ((CWY)), Goodman Group ((GMG)), Hotel Property Investments ((HPI)), JB Hi-Fi, NextDC ((NXT)), Qube Holdings ((QUB)), Santos ((STO)), Seek ((SEK)), South32 ((S32)), Steadfast Group ((SDF)), Uniti Group ((UWL)), and Woodside Petroleum ((WPL)).

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Shaw and Partners most favoured software companies on the ASX has now accumulated to five: Mach7 Technologies ((M7T)), Whispir ((WSP)), Gentrack Group ((GTK)), Keypath Education International ((KED)), and Elmo Software ((ELO)).

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Citi analysts' key picks for investors looking to add technology to their portfolio post-February are Xero ((XRO)), Megaport ((MP1)) and Hub24 ((HUB)).

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Post-February, UBS analyst Tim Plumbe has expressed his key picks for ASX-listed small cap stocks, which becomes Emerging Companies in UBS lingo.

Those key picks are Adairs ((ADH)), Breville Group, BWX Ltd ((BWX)), Corporate Travel Management ((CTD)), EML Payments ((EML)), GUD Holdings ((GUD)), Kelsian Group ((KLS)), Nitro Software ((NTO)), NRW Holdings ((NWH)), NextDC and Siteminder ((SDR)).

A few names didn't make the selection, but they are still liked nevertheless: Bapcor ((BAP)), Clover Corp ((CLV)), G8 Education ((GEM)), Infomedia ((IFM)), Megaport and Webjet ((WEB)).

Specifically for technology exposure, UBS has both Nitro Software and Siteminder on position number one, followed by Megaport.

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Wilsons list of Conviction Calls has been enlarged through the inclusion of Ridley Corp ((RIC)).

Other names that have kept their membership are ARB Corp ((ARB)), Collins Foods ((CKF)), Aroa Biosurgery ((ARX)), Immutep ((IMM)), ReadyTech Holdings ((RDY)), Plenti ((PLT)), and City Chic Collective ((CCX)).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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