Rudi’s Comprehensive February 2023 Review

This story features NICK SCALI LIMITED, and other companies. For more info SHARE ANALYSIS: NCK

Download related file: FNArena-Reporting-Season-Monitor-Feb-2023

A compilation of stories relating to the February 2023 corporate reporting season in Australia, including FNArena’s final balance for the season.

Content (in chronological order of publication):

-Rudi’s View: CSL, Mineral Resources, Ridley & ReadyTech
-Guide To February Results Season
–The Opening Eleven
-Rudi’s View: AUB Group, Endeavour, Lottery Corp & Suncorp
-February Focus On Resilience & Dividends
-February Results Thus Far
-Corporate Australia Showing Resilience
-Commodities –  Lithium & Dividends
-Consumer & Gaming Stocks
-Advertising & Media
-Insurers
-Rudi Interviewed: Tough February
-February: Brutal And Underwhelming, So Far
-February's Sobering Reality Check
-February Trends, Winners, Signals & Losers
-February Results: Final Notes & Observations
-Rudi’s View: Domino’s Pizza, Newcrest & Qantas
-Post February Favourites & Duds
-All-Weathers: Post-February

By Rudi Filapek-Vandyck, Editor

Rudi’s View: CSL, Mineral Resources, Ridley & ReadyTech

Put simply: corporate earnings are still facing a down-cycle this year, but there are a number of offsetting positives in the form of declining inflation, central bankers nearing the end of their tightening policies, China re-opening and broad expectations that economic recessions are not unavoidable this year.

Market strategists at Wilsons have drawn the conclusion that the sum total of this year's conflicting drivers will be a net positive for equity markets, albeit not in a major way.

In Australia, Wilsons agrees with the perception that iron ore prices are probably a bit bloated here, and this makes share prices for major bulk miners on the ASX possibly equally bloated, while local banks will not escape the impact from higher interest rates on businesses and household budgets.

Moderate, but positive returns thus, at the index level.

Wilsons' asset allocations have moved to Underweight cash and Overweight global and domestic equities, with (now) a neutral portfolio allocation to fixed income (bonds) and alternative investments (think infrastructure and gold).

In terms of ASX favourites, Wilsons has chosen the following five:

-Insurance Australia Group ((IAG))
-Mineral Resources ((MIN))
-NextDC ((NXT))
-Netwealth Group ((NWL))
-ResMed ((RMD))

Then there's a separate list from the institutional research desk, which consists of the following "investment ideas":

-Aroa Biosurgery ((ARX))
-Immutep ((IMM))
-Nick Scali ((NCK))
-PeopleIn ((PPE))
-Pro Medicus ((PME))
-ReadyTech Holdings ((RDY))
-Ridley Corp ((RIC))
-Select Harvests ((SHV))
-TechnologyOne ((TNE))

We're not done yet as Wilsons has also shared its favourites for the upcoming February reporting season:

-Autosports Group ((ASG)), CSL ((CSL)), Costa Group ((CGC)), Family Zone ((FZO)), Nick Scali, PeopleIn, Pepper Money ((PPM)), ReadyTech Holdings.

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Chief investment officer Tim Rocks and his team at Evans & Partners is equally drawn to the market's newfound optimism in 2023. Small caps have underperformed last year, but should do well if things improve throughout 2023, both in terms of interest rates and economic recoveries.

Analysts at the firm, when queried about their favourites, came up with the following short list:

-Life360 ((360))
-KMD Brands ((KMD))
-OFX Group ((OFX))
-Enero Group ((EGG))
-Flight Centre ((FLT))

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Small cap specialists at UBS have equally been updating views and projections for ASX minnows ahead of the February tell all fest. UBS's overall view is that short-term the bias remains towards negative earnings adjustments, but the broker has plenty of favourites to own for this year and beyond:

-Breville Group ((BRG))
-Corporate Travel Management ((CTD))
-Hansen Technologies ((HSN))
-IDP Education ((IEL))
-IPH Ltd ((IPH))
-Kelsian Group ((KLS))
-Nufarm ((NUF))
-Ridley Corp ((RIC))
-Webjet ((WEB))

Others worthy mentioning (says the broker) are APM Human Services International ((APM)), NRW Holdings ((NWH)) sand Siteminder ((SDR)).

UBS is cautious on Eagers Automotive ((APE)), Bega Cheese ((BGA)) and InvoCare ((IVC)).

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Zooming in on the February results season, UBS sees risk for negative surprises from AMA Group ((AMA)), Megaport ((MP1)), as well as from disappointing guidance from Eagers Automotive, Autosports Group ((ASG)), Bapcor ((BAP)), InvoCare, NRW Holdings and Temple & Webster ((TPW)).

Positive risk is seen for IDP Education, Imdex ((IMD)) and Inghams Group ((ING)) with expectations for upgrades in forward guidance from Audinate Group ((AD8)), AMA Group, APM Human Services International, Costa Group, G8 Education ((GEM)), Hansen Technologies, IDP Education, MA Financial ((MAF)), NextDC, PWR Holdings ((PWH)), Ridley Corp, and Siteminder.

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UBS's team of real estate analysts equally shared their 2023 sector favourites: Stockland ((SGP)), Goodman Group ((GMG)), GPT ((GPT)) and Lendlease ((LLC)) with Sell ratings for Vicinity Centres ((VCX)), Charter Hall Long WALE REIT ((CLW)), and BWP Trust ((BWP)).

Ord Minnett's three favourites for the sector are Charter Hall Long WALE REIT (in contradiction to UBS), RAM Essential Services Property((REP)), and Waypoint REIT ((WPR)).

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Portfolio strategists at Shaw and Partners are not prepared to shift to an Overweight position on equities, but they have moved to a Neutral stance (from Underweight) as the risk for global recessions has receded.

Within Australian equity portfolios, Shaw prefers Energy, Materials and global growth stocks to Banks and Real Estate.

As reported on January 19 already, Shaw and Partners is now also in the business of publishing selections for its Model Portfolio, including eight large cap (ASX100) favourites; James Hardie ((JHX)), Metcash ((MTS)), Qantas Airways, ResMed, Santos ((STO)), Telstra ((TLS)), Worley ((WOR)) and Xero ((XRO)).

Among smaller cap propositions ("emerging companies") Shaw selected Audinate Group, Black Cat Syndicate ((BC8)), Boab Metals ((BML)), Calix ((CXL)), Catapult Group International ((CAT)), Hub24 ((HUB)) and Regal Partners ((RPL)).

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The list of Best Ideas at stockbroker Morgans has shrunk to 33 companies with the recent update leading to the removal of BHP Group ((BHP)), AGL Energy ((AGL)), Incitec Pivot ((IPL)), Healius ((HLS)) and IDP Education.

In their place four others joined: CSL, Mineral Resources, Qantas Airways ((QAN)), and Megaport.

Morgans also offered a few "tactical trading ideas" into February reports: Qantas, Megaport, Lovisa Holdings ((LOV)), Coles Group ((COL)) and HomeCo Daily Needs REIT ((HDN)).

The last time we published the complete list of inclusions we counted 44 companies. Might be time to publish the full overview in the next update.

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If 2023 is to become the opposite of last year, then local technology stocks should return into investors' favour yet again. Sector analysts at Goldman Sachs are hopeful.

Their advice to investors is to focus on profitable growth, sector inflections and mergers and acquisitions (M&A).

Higher Risk Buys are: Xero ((XRO)), Life360, and Megaport.

Defensive Buys are: Objective Corp ((OCL)), Data#3 ((DTL)) and REA Group ((REA)).

Goldman Sachs has also upgraded both Fineos Corp ((FCL)) and ReadyTech Holdings to a Buy.

Macquarie's 'TMT' specialists (Technology, Media and Telcos) have a different take on things. Their favourites are: Telstra, IDP Education, Carsales ((CAR)) and oOh!media ((OML)).

Macquarie thinks there's more negative news yet to unfold for your traditional media companies and suggests investors should consider buying into this sector by mid-year, maybe.

UBS's TMT analysts have Buy ratings for TPG Telecom ((TPG)), Nine Entertainment ((NEC)), News Corp ((NWS)), Carsales, Domain Group ((DHG)), Seek ((SEK)), and WiseTech Global ((WTC)).

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Also: the irony of the share market. Shares in Qantas Airways left solid earth behind in late December and seemed to be cruising to ever higher highs until mid-month January. On January 25, Wilsons published a dedicated strategy update, singing the praises of Australia's national airline, while signaling there could be a lot more upside ahead.

Qantas shares have only continued to fall since.

This by no means is any reflection on Wilsons research. As a matter of fact, Qantas and Telstra are probably the two most quoted stocks in Australia when it comes to improving views and forecasts. It's just the share market is not always willing to play along, not immediately anyway.

Wilsons anticipates a re-rating for Qantas shares on further earnings upgrades, which should remove the current discount for a relative valuation premium instead.

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Healthcare sector analysts at RBC Capital have lined up their favourites ahead of financial results: CSL, Sonic Healthcare ((SHL)), Estia Health ((EHE)), Alcidion Group ((ACL)), Integral Diagnostics ((IDX)), Capitol Health ((CAJ)), and Alcidion Group ((ALC)).

Macquarie only has two favourites: CSL and ResMed. Least preferred (for Macquarie) are Cochlear ((COH)) and Sonic Healthcare.

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ETF services provider VanEck is increasingly communicating the views and forecasts by its Portfolio Manager Cameron McCormack.

Not that dissimilar from opinions and forecasts expressed elsewhere, McCormack suggests the banks may no longer be superior performers in 2023, with CommBank ((CBA)) in particular singled out as one of the most expensively priced banks in the world.

Resources like BHP might yet experience more tailwind benefits from China re-opening, while A-REITs look attractively priced with the RBA about to pause in its tightening. Here McCormack highlights Goodman Group, just about everyone's favourite in the sector.

Pressure on discretionary spending should refocus investors attention on consumer staples, such as Woolworths Group ((WOW)).

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Matt Peron, director of research at Janus Henderson, advises investors it's time to start looking for Quality companies again.

"While quality is considered a factor in its own right, we believe the concept of steady cash flows and fortified balance sheets is style- and market cap-agnostic; these companies exist across the equities universe."

Janus Henderson's view is economies such as the US are facing a mid-cycle slowdown this year, but will avoid economic recession.

Peron's favourite investment style, not just this year, but beyond 2023, is the so-called GARP; Growth at a reasonable price. Look for Quality that has been beaten down, is the implicit message from Peron's recent strategy update.

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On the subject of Quality, Bell Asset Management recently shared the following with investors in its managed funds:

"We feel that Quality is poised for a period of strong outperformance in the next few years. As macro conditions soften, inflation remains high and interest rates creep higher, companies with strong balance sheets and pricing power will collectively deliver superior earnings outcomes which should drive better relative returns.

"We also feel that the ‘Reasonable Price’ part of our ‘Quality at a Reasonable Price’ approach will be an important driver for our strategy. 2022 gave us a glimpse of how painful multiple contraction can be and how important valuation discipline can be."

But also:

"Over the last 40 years, the Quality factor has outperformed by an average of 9.0% in years when US CPI has exceeded 4.0% with the exception of 1988 and 2022.

"When looking at the more recent performance of the Quality factor we would make the point that in the last 3 years, it has marginally outperformed to the tune of 1% annually vs its 3.3% annual outperformance since 1994."

Guide To February Results Season

As I traditionally like to remind investors: every corporate results season has its own character and dynamics. The overall macro background, including index level and share price moves, plays an important role in understanding the overall context.

This time around, share markets have rallied, and rallied hard. In particular when we look back at the lows in September. That observation still stands if we simply measure returns year-to-date.

The past four-five weeks have witnessed an almost indiscriminate pick-up in global sentiment, driven by macro-related drivers (inflation, bonds, central banks, China). While corporate earnings play a minor role when macro rules the day, at some point investors will be forced to zoom in and price stocks accordingly.

This does not by default have to spell negative news, though there appears to be plenty of room to square off short-term results against further-out uncertainties. History suggests once share prices have had a strong run leading into corporate results, the balance of probabilities shifts towards 'disappointment' with the onus on management at the helm now having to prove why shares in the company should enjoy more upside.

Monday's interim result release by furniture retailer Nick Scali ((NCK)) seems to fit in with this thesis. Similar to the likes of JB Hi-Fi ((JBH)) and Super Retail ((SUL)), Nick Scali's financial report delivered everything a loyal shareholder would want from its investment: strong profit growth, including at the EPS level, stable margins, excellent cost control and synergies kicking in from acquisitions.

Trading in January was so strong, it even took management at the firm by surprise. The dividend declared missed forecasts though, and there was no guidance for the second half.

Traditionally, companies that do provide guidance are being rewarded while those that abstain or move into non-quantifiable gobbledygook ("we see a bright future ahead") will trade at a discount to intrinsic valuation. On Monday, Nick Scali shares sold off by more than -13%.

The local reporting season has hardly started with the true tsunami in corporate releases only commencing from mid-month, but already there are plenty of signals suggesting the harsh assessment of Nick Scali's market release might well become a regular feature this season.

Investors better sit up and take note.

 The Opening Eleven

The first eleven ASX-listed companies to release financial updates thus far have mostly seen share prices weaken on the day.

First instant 'punishments' were reserved for ResMed ((RMD)) and Champion Iron ((CIA)), later followed up with similar responses to updates from Pinnacle Investment Managers ((PNI)), Credit Corp ((CCP)) and IGO Ltd ((IGO)), and, on Monday, Nick Scali, DDH1 ((DDH)) and Dexus Convenience Retail ((DXC)).

The latter two can possibly be explained by the general risk-off sentiment on the day. Share prices weakened only slightly, while Credit Corp management somehow managed to reverse the initial response while chatting with institutional investors. Hence, the news is not as bad as it looks at prima facie.

This still only leaves three releases with an instant positive response, and only one shot the lights out: beaten-down asset manager Janus Henderson ((JHG)). Its share price is now trading 18% above FNArena's consensus target for the stock, with not one single positive rating from the brokers covering this company.

Centuria Office REIT ((COF)) and Centuria Industrial REIT ((CIP)), two bond-proxies that have had a challenging time over the past twelve months, have both enjoyed a positive market response post interim report.

The one common denominator for these early reporters has been cost inflation, more specifically: whether companies have been able to contain it, or not. The same eagle-eyed focus from investors was already apparent during January when small cap technology companies and commodity producers released quarterly trading updates.

The problem for both analysts and investors is this item is incredibly difficult to forecast. Add much higher share prices and it's not difficult to see why a healthy dose of caution seems but appropriate.

Equally so: great companies with solid growth prospects might still disappoint short-term, offering opportunity for those who can look beyond the immediate market response.

Healthcare

One of the sectors that continues to polarise around covid-beneficiaries and re-opening plays is that of healthcare services in Australia.

As said, a robust quarterly performance from ResMed ((RMD)) did not please everyone, and questions remain around what'll happen with key competitor Philips from the Netherlands. ResMed, history strongly suggests, could well be one prime example of reporting season opportunity for investors confident in the longer term trajectory.

Certainly, general sentiment is improving for industry heavyweight CSL ((CSL)), as has also been apparent from the two updates on Conviction Calls published in January. CSL has been nominated by the team of healthcare analysts at Credit Suisse as a potential candidate to deliver a positive surprise in February, alongside New Zealand-based Ebos Group ((EBO)) which has been a solid performer since listing on the ASX in late 2013.

Credit Suisse sees rather mixed prospects elsewhere in the sector, with a negative bias for Healius ((HLS)), Australian Clinical Labs ((ACL)) and Ansell ((ANN)).

Peers at Macquarie have a sector preference for ResMed and CSL, with Cochlear ((COH)) and Sonic Healthcare ((SHL)) least preferred. Macquarie is equally cautious towards Healius.

Sector analysts at Citi also nominated ResMed and CSL, plus Fisher & Paykel Healthcare ((FPH)). Their preference is for product manufacturers over typical services providers, on less reliance on government funding and less exposure to stressed labour markets.

Citi points out Cochlear's second half might be negatively impacted by covid in China, but the analysts retain a positive view longer term.

Wilsons' Best Ideas

Wilsons' Best Ideas for the February reporting season also includes CSL, as well as Nick Scali. Clearly, the latter idea did not work out as intended with margins not increasing as was the anticipation.

Other Best Ideas are: Pepper Money ((PPM)), Austosports Group ((ASG)), Costa Group ((CGC)), PeopleIn ((PPE)), Family Zone ((FZO)), and ReadyTech Holdings ((RDY)).

Stockbroker Morgans sees risks for Ansell, Domino's Pizza ((DMP)), Ramsay Health Care ((RHC)), Credit Corp, Healius, Hub24 ((HUB)) and Inghams Group ((ING)) but also puts forward three so-called counter-consensus calls (where the broker is more confident than its peers): Blackmores ((BKL)), Helloworld Travel ((HLO)) and Qantas Airways ((QAN)).

Media

When it comes to media companies, Credit Suisse ignores the traditional legacy businesses and concentrates on online platform businesses instead.

Credit Suisse very much likes Seek ((SEK)) and Carsales ((CAR)).

Financials

Among diversified financials, Credit Suisse sees upside for Challenger ((CGF)) and Perpetual ((PPT)) this month, and mixed dynamics just about everywhere else.

A negative bias has been placed on Computershare ((CPU)), Netwealth Group ((NWL)), Platinum Asset Management ((PTM)) and Insignia Financial ((IFL)).

The team at UBS combines insurers with other financials (ex-banks) and expects to see 'good news' from Computershare, Suncorp Group ((SUN)), Steadfast Group ((SDF)), nib Holdings ((NHF)), Challenger, Netwealth, and Pexa Group ((PXA)).

For negative surprises (most likely), UBS has singled out the ASX ((ASX)), Insurance Australia Group ((IAG)), AMP ((AMP)), Pinnacle Investment Managers, and Magellan Financial ((MFG)). Since the publication of that list, IAG has issued a profit warning and Pinnacle's market update equally received a good old fashioned share market shellacking.

Computershare is UBS's general top pick for the sector, followed by QBE Insurance ((QBE)), Netwealth, Hub24, and Steadfast Group. The bottom of the ranking is made up by Magellan (last), preceded by AMP and Pinnacle Investment.

Packaging

When it comes to exposure to consumer spending, Macquarie suggests the local packaging sector comes with a relatively defensive profile, but companies are not 100% immune from a pending slow down.

Macquarie's sector preferences see Orora ((ORA)) placed first, followed by Amcor ((AMC)), then Pact Group Holdings ((PGH)).

Analysts at Evans & Partners are equally more positive on Orora, with a neutral position on Amcor.

Travel

Goldman Sachs prefers Corporate Travel Management ((CTD)) and Webjet ((WEB)) over Flight Centre ((FLT)) ahead of result releases.

Overall, the broker anticipates investors' focus is about to shift away from top-line momentum for this sector to cash and profit generation, as well as "longer term strategic use of cash".

Sector analysts at Citi have chosen a different angle. They see indications that last year's strong recovery is stallling, but still, momentum for the likes of Webjet and Qantas should be strong enough. More volume-based business models, such as those of Corporate Travel and Flight Centre, may err on the softer side, suggests Citi.

Telecommunication

Sector analysts at Goldman Sachs made a big call in January: they see the local telecom sector enjoying its most attractive outlook for revenue growth in many years.

A return in population growth, plus international travel, combined with less intense competition should assist companies like Telstra ((TLS)) to offset pressures from inflation, predict the analysts. They remain equally positive on data centres.

Goldman Sachs' two sector favourites are Telstra and NextDC ((NXT)). The broker has a Sell rating for Spark New Zealand ((SPK)).

Consumer-oriented Companies

February 2023 will revolve around cost control and margins, predicts Goldman Sachs. Consumer sector preferences lay with Woolworths Group ((WOW)) and recent offshoot Endeavour Group ((EDV)), plus Breville Group ((BRG)).

The broker has Sell ratings for Wesfarmers ((WES)) and Coles Group ((COL)).

Generally speaking, analysts remain sceptical about the outlook for discretionary retailers later this year. Goldman Sachs is not an exception.

A-REITs

One sector that keeps polarising as forecasts for a tougher consumer environment later this year weigh on sentiment is the local real estate sector. Analysts at UBS anticipate investors' focus is shifting towards capital requirements (yes or no), the health of underlying tenants/subs-ectors and the outlook for transactions/asset values.

UBS's Buy rating are reserved for Stockland ((SGP)), Goodman Group ((GMG)), GPT ((GPT)) and Lendlease ((LLC)). The broker has Sell ratings for Vicinity Centres ((VCX)), Charter Hall Long WALE REIT ((CLW)), and BWP Trust ((BWP)).

Goldman Sachs' Predictions

Looking forward to the upcoming reporting season in general, analysts at Goldman Sachs are forecasting positive news flow (likely upside surprises) from QBE Insurance, Qantas Airways, Temple & Webster ((TPW)), Judo Capital Holdings ((JDO)), Endeavour Group, Corporate Travel Management, Qualitas ((QAL)), Data#3 ((DTL)), Telstra and Breville Group.

Candidates listed for a likely negative surprise are Sonic Healthcare, Coles, Bega Cheese ((BGA)), a2 Milk ((A2M)), Tabcorp Holdings ((TAH)), Dicker Data ((DDR)) and Altium ((ALU)).

Morgan Stanley's Key Picks

Morgan Stanley's Small Cap Key Picks for February:

-In a positive manner: Dicker Data, Jumbo Interactive ((JIN)), Premier Investments ((PMV))

-While advocating investors be more cautious towards: ARB Corp ((ARB)), Bapcor Holdings ((BAP)), and Lovisa Holdings ((LOV))

Australian banks do not generally report in February, with exception of CommBank ((CBA)) and Bendigo and Adelaide Bank ((BEN)). The latter is reportedly in merger talks with Bank of Queensland ((BOQ)) while the focus on CommBank mostly revolves around its hefty sector premium.

The sector in general seems positioned for strong operational momentum, for now. Again, plenty of sceptics around who wonder what momentum will look like when RBA rate hikes start impacting later this year.

Overall, February should still see a strong return of capital to investors through dividends and share buybacks though general anticipation is for the first signs of 'plateauing' to announce themselves. Resources companies will be paying out less than last year, and likely less again next year.

Banks are still in post-covid recovery mode and no dividend cuts are anticipated, not even with the anticipation of a tougher period ahead.

Citi's Forecasts

Those aforementioned Quant analysts at Citi are pretty confident about positive surprises from Brickworks ((BKW)), CommBank, Coles, Fletcher Building ((FBU)), Goodman Group, Imdex and ResMed. Again, the latter hasn't genuinely played out as expected.

Have been identified for a most likely negative surprise: 29Metals ((29M)), Corporate Travel Management, Flight Centre, and Monadelphous ((MND)).

Rudi’s View: AUB Group, Endeavour, Lottery Corp & Suncorp

The Australian share market is no longer 'cheap', but then it's equally not 'expensive' either.

Such is the conclusion drawn by Matthew Hodge, Director of Equity Research, ANZ at Morningstar Australia.

Like so many market observers, Hodge is surprised the market has put in the performance it has to date, given risks remain on the horizon, but maybe this is yet another great moment in time to reassess the portfolio and review the strategy?

What if markets go through another period of above-average volatility, or maybe another meaningful downturn? Hodge's advice is to prepare a wish list now.

Which stocks would you like to own, but at a cheaper price?

Hodge's personal wish list revolves around "businesses with strong competitive positions, pricing power and either robust cash flows and dividends or growth prospects at least in line with nominal GDP growth."

Candidates that instantly spring to mind have a clear Quality tag attached (revealing a large overlap with my personal research into All-Weather Performers – see bottom of today's story).

As such, Hodge would strongly consider AGL Energy ((AGL)), APA Group ((APA)), ASX ((ASX)), AUB Group ((AUB)), Auckland Airport ((AIA)), Aurizon Holdings ((AZJ)), Brambles ((BXB)), Carsales ((CAR)), Charter Hall ((CHC)), Cochlear ((COH)), CSL ((CSL)), Domain Holdings Australia ((DHG)), Deterra Royalties ((DRR)), Domino's Pizza ((DMP)), Endeavour Group ((EDV)), Fineos Corp ((FCL)), Goodman Group ((GMG)), James Hardie ((JHX), InvoCare ((IVC)), Lottery Corp ((TLC)), REA Group ((REA)), Seek ((SEK)), Sonic Healthcare ((SHL)), Steadfast Group ((SDF)), Telstra ((TLS)), Transurban ((TCL)), and WiseTech Global ((WTC)), alongside the Big Four banks.

As is always the case when considering adding Quality to the portfolio: "It’s just often hard to grab them at a decent price though."

Evans & Partners

The three person strategy team at Evans & Partners is not quite as sanguine and relaxed as is Morningstar, instead conveying the message investors should prepare for downside.

In their own lingo, this becomes: "The risks to markets look increasingly skewed to the downside given the recent run in asset prices and assumptions around future earnings growth."

Australia will avoid economic recession, but there'll be a slowing in economic activity and probably recessions elsewhere, warns E&P. Which is why the team's focus lays with high quality businesses with defensive earnings profiles, sustainable dividend yields and/or clear earnings momentum.

To please all sorts of clients and portfolios, Evans & Partners has constructed multiple lists, each with their own focus and specific filters.

First up, Quality companies. The current short list comprises of:

-Brambles
-CSL
-Macquarie Group ((MQG))
-Rio Tinto ((RIO))
-Woolworths Group ((WOW))

Note: BHP Group ((BHP)) was previously included but has recently been replaced with Rio Tinto.

Growth stocks:

-Carsales
-NextDC ((NXT))
-Treasury Wine Estates ((TWE))
-Xero ((XRO))

Yield stocks:

-APA Group
-HomeCo Daily Needs REIT ((HDN))
-Telstra
-Wesfarmers ((WES))
-Waypoint REIT ((WPR))

Tactical recommendations (these are temporary 'value' opportunities that do not necessarily meet any criteria for the above lists):

-Flight Centre ((FLT))
-Qantas Airways ((QAN))
-Woodside Energy ((WDS))

Canaccord Australia

Strategists at Canaccord Australia now prefer bonds, where they see "even potential for capital gains" while a share market near all-time highs cannot muster more than a Neutral view.

That Neutral view is backed up with a preference for more defensive sectors and stocks on the ASX, with all of Woolworths, Endeavour Group, The Lottery Corp and Amcor ((AMC)) prominently held, alongside post-pandemic recovery stories through Qantas, Ramsay Health Care ((RHC)), Transurban and Computershare ((CPU)).

The latest round of changes has seen Treasury Wines and Goodman Group being added, alongside the removal of Medibank Private ((MPL)) and Lendlease ((LLC)) from the Model Portfolio.

The Portfolio retains an overweight allocation to large cap resources and an underweight position in local banks.

Morningstar's Best Ideas

The February update on Morningstar Australia's Best Ideas saw the removal of Magellan Financial ((MFG)) and the inclusion of AUB Group.

Magellan's departure marks a change in view with Morningstar no longer as confident in a pending earnings recovery for the asset manager while the nomination of the small-cap insurance broker, on my observation, falls in line with a general re-appraisal of this specific sector, with analysts generally lauding the cash-generative and resilient nature of the industry, which also includes Steadfast Group and PSI Insurance Group ((PSI)).

Usually, the sector preference goes to either Steadfast (the largest) or to AUB Group (cheaper priced).

Outside of the newest inclusion, Morningstar's Best Ideas now consist of:

-AGL Energy
-Aurizon Holdings
-Brambles
-Fineos Corp
-InvoCare
-Kogan ((KGN))
-Lendlease
-Newcrest Mining ((NCM))
-Santos ((STO))
-TPG Telecom ((TPG))
-Westpac ((WBC))
-WiseTech Global

Morgan Stanley

Morgan Stanley's focus remains on forecasts for corporate earnings which are (firmly) believed to be too high still, in particular in the US but equally so in Australia.

While resources companies might still enjoy upgrades to forecasts on the back of renewed optimism for the sector (including higher product prices), Morgan Stanley is not so confident about all other sectors of the local economy.

Changes made to the Model Portfolio include the removal of Sonic Healthcare, OZ Minerals ((OZL)) and Worley ((WOR)) and adding exposure to Suncorp, GPT Group ((GPT)) and The Lottery Corp.

Technology Sector

ETF provider VanEck Portfolio Manager Cameron McCormack predicts cheaper-valued Value stocks will continue to outperform in 2023, with the Australian share market poised to outperform most foreign peers.

This view comes also with the assessment the US technology sector is repeating the experience post Nasdaq meltdown in 2000. Don't go there, is the warning, anything that looks 'cheap' will prove a trap.

"Investors chasing easy money in tech growth stocks should be wary of prolonged macroeconomic headwinds facing the sector."

McCormack is willing to concede there will be exceptions, but unprofitable technology companies in particular remain in the sin bin, on his multi-year trend assessment.

The team of technology sector analysts at RBC Capital in Australia is not quite as negative, but here the warning is nevertheless: slowing economic growth implies more downside for Growth and Technology stocks.

History suggests there's more PE compression coming for the sector, warns RBC Capital, and this means investors picking exposures in the sector better be selective.

RBC Capital prefers companies that are profitable, enjoy high margins, with positive free cash flow, and a strong balance sheet.

Ahead of February results, the preference lays with Altium ((ALU)) and InfoMedia ((IFM)).

Investors are advised to steer clear of Appen ((APX)) and EML Payments ((EML)).

February Focus On Resilience & Dividends

Financial markets are supposed to be forward-looking.

This is where the ambiguity begins, and the difficulty to understand what is happening, and why.

Those among us who have been watching markets for a long while know the supposed forward-looking dynamic is far from perfect. Whether it works or not is mostly dependent on from which starting point our observation begins.

Global equities have rallied hard since September last year, but equities have, effectively, front-run corporate earnings and fundamentals. This need not be a problem as fundamentals can catch up, assuming this is what happens next.

The problem with this bullish view is that economies are slowing, and they are almost guaranteed to continue slowing as the year progresses. Central banks are still hiking rates and the real impact from last year's tightening hasn't fully impacted just yet.

Hence, it's not difficult to see why so many observers and market watchers are skeptical whether indices can hold on to their gains. Corporate profits are under pressure because economic momentum is deflating, but also because cost inflation is still very much a negative feature.

If we stick to the positive thesis, history shows share prices start anticipating the trough in earnings well before that trough is in place. This forward-looking dynamic is shown in the graphic below (courtesy of Janus Henderson).

To read the graphic: bars in orange show the time it takes for investors to de-rate share prices (via contracting PE ratios) ahead of a recession, while the bars in black show it usually takes a lot longer for corporate earnings to bottom.

The one exception shown is the adjustment post-Nasdaq meltdown that had a lot longer to run because of the unprecedented exuberance that preceded it.

So… are share prices now correctly looking forward and beyond the downturn in corporate margins and profits?

Depends on what follows next. How much weakness is yet to show up in corporate profits?

My guess is it will require central bankers to stop tightening, at the very least, before equity markets can comfortably initiate the next sustainable bull market.

In the meantime, large gaps will open up between those companies with positive momentum, and those who prove themselves as relatively resilient, and those that have neither momentum nor resilience.

That process is starting in February.

February Results Thus Far

In line with my suggestion in Weekly Insights last week (see further below), investors are difficult to please thus far in this February reporting season. The onus is on companies to provide plenty of positive newsflow so that share prices can continue the upward momentum, or else.

In most cases, the 'or else' prevails; most share prices weaken on the day of financial results releases.

But the season is still young and Monday is showing enough evidence to the contrary to keep optimism alive with all of Audinate Group ((AD8)), Carsales ((CAR)), Endeavour Group ((EDV)), and even Insurance Australia Group ((IAG)) enjoying a positive response post market update.

There is no such relief for Aurizon Holdings ((AZJ)) and Lendlease ((LLC)) with both sinking in excess of -6% despite the fact both share prices are trading near lows from the past decade.

The obvious observation to make here is that a very bad past experience provides no guarantee the future will be a lot better.

Both Aurizon and Lendlease have, on balance, been subjected to downward pressures for a long while. Both on occasion receive favourable commentary from your typical value-investor, but have proven more of a value-trap than a bargain opportunity for investors.

Both pay dividends to offer at least some offset.

In contrast, Carsales is trading near its highest price post all-time record high achieved in 2021, proving yet again that a quality business doesn't lose its lustre overnight. But let's not fool ourselves, being of High Quality does not guarantee a positive response on market update, in particular not this time around.

REA Group ((REA)) is widely regarded as one of the highest quality businesses listed on the ASX. Its half-yearly update on Friday has been generally well-received by analysts, but the share price is now falling for the second day in a row.

The challenge for investors this month will be to distinguish short-term from longer-term, and to understand there's also still a macro influence that very much remains in play.

Equally telling: on Monday, the FNArena Corporate Results Monitor stats show 8 misses against 7 beats as far as the first 28 corporate updates are concerned. This is not what is required to keep this market in a positive mood.

Not making things any rosier: two of the 8 beats were delivered by REITs, while two other beats -ResMed ((RMD)) and Nick Scali ((NCK))- encountered significant share price decline.

Admittedly, it's early in the season, still. We should have a much better picture by Friday. Even by then, there remain more company releases scheduled for the following week than during the first half of the month.

Welcome to the Australian way!

(Apparently a lack of sufficient accountants is to blame, not necessarily the companies or the ASX).

Here's what Ord Minnett, through Malcolm Wood, head of asset allocation, communicated to its clientele on Friday:

"The ASX200 has front-loaded returns, limiting nearterm upside: The rally has lifted the Forward PE 2.5pts to ~15x. Earnings are stretched, 30% above pre-COVID levels. The soft landing has largely been discounted. The US is highly risky, at an elevated ~18.5x PE, despite rate and earnings risks.

"We are increasingly cautious and trim our Australia overweight. We await a US correction and signs that the RBA can pivot to rate cuts to turn bullish again."

Corporate Australia Showing Resilience

Early indications are corporate margins are holding up, with no cliff apparent to pull corporate profits into a deep trough, suggests MST Access senior analyst, Hasan Tevfik.

This is good news as Tefvik is one among many who believes Australia remains well-positioned relative to most foreign economies. This should translate into a relatively more resilient performance from corporate Australia.

Thus far, resilience in profit forecasts has largely relied on the banks and commodity producers, though Credit Suisse has observed healthcare companies have become positive contributors as well recently.

Tevfik is worried commodity producers are operating on peak margins, but so far there are no signals for a pending downturn with commodity prices staying in the higher-for-longer lane, compensating for the higher costs that are impacting on those businesses.

Biggest positive surprises thus far have been delivered by Boral ((BLD)) and Macquarie Group ((MQG)), on Tevfik's assessment, while the biggest disappointers to date have been Insurance Australia Group and Healius ((HLS)).

Note IAG's share price responded well to the insurer's financial result, but a heavy profit downgrade had been announced earlier.

Though it's early days yet, one of the positives that might come from this results season are ongoing surprises through dividends. This is, sort of, tradition in Australia, especially during tougher times.

Tevfik observes bottom-up dividend forecasts have increased by 8%. Of the $100bn that will be announced by ASX200 companies this season, nearly $40bn will come from commodity producers.

Having said all of this, reductions in dividend payouts have been much greater than expected from IAG, Healius and Boral. Amcor ((AMC)) boosted its share buyback by US$100m to US$500m.

Market strategists at Wilsons share Tevfik's concerns about upcoming headwinds for commodity producers, specifically iron ore, while Wilsons is less sanguine about the outlook for banks.

UBS points out higher-for-longer, in terms of bond yields, and more rate hikes from the RBA imply the odds for a 'hard landing' locally are shortening (i.e. more likely to happen).

Commodities –  Lithium & Dividends

One of the market segments that will be closely followed given forecasts for an extended runway for growth are ASX-listed producers and explorers that make up the local lithium sector.

Interestingly, Macquarie analysts have forecasts that in almost every case sit below market consensus, indicating there might be plenty of room for below-expectation results.

But Macquarie holds an overall positive view on the sector and retains preferences for Mineral Resources ((MIN)) and Pilbara Minerals ((PLS)) among producers, and for Patriot Battery Metals ((PMT)) and Global Lithium Resources ((GL1)) among explorers.

Peers at Goldman Sachs currently only rate one of local lithium companies a Buy -Allkem ((AKE))- with all others rated Neutral and one Sell reserved for Core Lithium ((CXO)).

Macquarie is currently positioned above consensus for mineral sands producer Iluka Resources ((ILU)), for which the broker also holds a positive view. Macquarie also remains supportive of producers of bulk commodities iron ore and coal – predominantly because prices remain higher for longer.

The metals desk at Goldman Sachs spells out what is already apparent from consensus forecasts: the current season will be the last hurrah for the commodities sector as far as dividends are concerned. Goldman Sachs maintains dividends are to remain an attractive feature for the sector in Australia, just not at the level seen in recent years.

This broker sees February as the start of reduced payouts as the major diversifieds will shift towards growth and decarbonisation capex, as well as acquisitions. Capex forecasts are likely too low, the broker argues, because of cost inflation. Goldman Sachs suspects BHP Group ((BHP)) might disappoint with its dividend, while capex is likely to surprise on the upside (a negative).

Negative capex indications might also come from BlueScope Steel ((BSL)), Mineral Resources and Alumina Ltd ((AWC)), the broker suggests. Goldman Sachs is positioned for positive surprises from Iluka Resources and Coronado Global Resources ((CRN)) and potential disappointment from Alumina Ltd.

Morgan Stanley is cautious regarding oil & gas companies with plenty of operational headwinds presenting themselves through supply chain constraints, supply cost inflation, and secondary permitting complications. Feedback from investors, apparently, is a preference for free cash flow over growth project risk.

Morgan Stanley suggests investors focus on leverage to Asia gas, free cash flow yields, and capital management initiatives.

Consumer & Gaming Stocks

Sector analysts covering consumer-related companies and the gaming sector are a lot more concerned about the downturn in spending that may yet be ahead.

Morgan Stanley has advised its clientele to be cautious and remain selective in which stocks to own. Though many stocks have underperformed noticeably year-to-date, several indications are pointing towards ongoing slowing momentum, the analysts warn.

Morgan Stanley has Overweight calls on IDP Education ((IEL)), Treasury Wine Estates ((TWE)), The Lottery Corp ((TLC)) and Premier Investments ((PMV)) and Underweight calls on both Coles Group ((COL)) and Woolworths Group ((WOW)), as well as Endeavour Group ((EDV)) and Harvey Norman ((HVN)).

An equally cautious and apprehensive Jarden has stuck with an Overweight rating for Adairs ((ADH)), inspired by a 'cheap' looking valuation.

Returning to the gaming sector specifically, Goldman Sachs is anticipating strong performances from lotteries and casinos, with higher competitive pressures in wagering. A weak result is expected from Tabcorp Holdings ((TAH)) while Sky City Entertainment ((SKC)) is nominated as a candidate for positive surprise.

Contrary to the generally positive views on The Lottery Corp, Goldman Sachs rates the stock a Sell with $3.70 price target. Ord Minnett recently downgraded the stock as a result to switching to whitelabeling Morningstar research.

Advertising & Media

Plenty of uncertainty presents itself for those traditional media companies reliant on advertisement income.

Goldman Sachs is nevertheless anticipating resilience and valuation support for most, with a preference for Nine Entertainment ((NEC)) and oOh!media ((OML)).

The broker also reminds investors companies are still executing on buybacks with less than 4% purchased of 10% buyback programs.

Insurers

Credit Suisse has identified upside risk for Medibank Private ((MPL)), nib Holdings ((NHF)) and Steadfast Group ((SDF)) and downside risk for QBE Insurance ((QBE)).

The latter is also expected to disappoint with its dividend due to "capital strain".

Rudi Interviewed: Tough February

It has become the 'unofficial' tradition in recent years: an interview with Livewire Markets ahead of yet another corporate reporting season in Australia. Below is a sub-edited transcript from last week's interview, released this week by Livewire (also available on YouTube).

James Marlay: Since early October the ASX200 has rallied a stunning 17% to the highest point in February. Straight off the bat: is this still a bear market or a rally with more positive long term implications?

Rudi Filapek-Vandyck: It'll depend on one's definition. We all tend to get more excited when share prices rally and we get more optimistic about the future. But I would caution that after a return of that magnitude which, let's call it out, has surprised most people in and around the market, such a strong rally is going to colour the February reporting season.

It will have a massive impact. Needless to say, company reports will be judged differently from when markets were still -17% lower. It's good for investors to keep this in mind. The benchmark for company results to exceed has now been reset. The bias has shifted. At the depths of last year, companies would be given a lot more leeway. Right now, I think companies will have to prove why share prices should still go higher.

Early indications are in most cases companies that release financial results see their share prices weaken, in some cases quite significantly so. While it's still early days, I think this trend may well dominate this season.

James: We'll touch on that trend in a bit more detail later on. I want us to revisit some commentary that we covered in our last interview (August last year). Back then it was your view that commodities were not recession-proof. I bring it up as we can all see today that the commodities component of the market has been very strong and a big driver of the market's recovery. Have you been surprised by the strength in commodities and what's the impact of China re-opening for Australian commodities?

Rudi: Similar to what has happened with equities in general, I think commodities have rallied ahead of fundamentals, and the China re-opening is part of it. The other thing which I think is very important to note is that the process of raising interest rates, higher bond yields and then the impact on the economy has been much slower than history would suggest.

Markets are not patient. They are not going to sit around and wait for things to happen. So the obvious observation is that the direct correlation between an economic slowdown, economic recession and commodity prices weakening is usually a pretty solid correlation. The problem thus far is, of course, we haven't seen any recessions just yet; we have hardly seen economies slow down.

This is an important part of the picture that is weighing over this reporting season. Some of the corporate results will look absolutely fantastic. But the question remains: what comes next?

For commodities, yes, they've all rallied and the fact that the slowdown is arriving in a much slower manner than one would expect has given investors a lot of leeway to put a lot more risk in markets, but there are still question marks out there. If we look at bond markets; bond markets essentially are forecasting a significant slowing in economic activity.

Whether this will result in a recession or not, we will have to wait and see, but markets don't wait around. Having said so, it may well be given the re-opening in China that even if we still see massive slowdowns in places like Europe and the US, the prices of commodities might remain well supported. I do think the commodities space will splinter. Not every commodity will hold its own.

Another observation is that I did make the forecast last year that oil would not hold above US$100/bbl, and that has proven correct. This hasn't translated into a similar pullback for share prices of producers. This is not that unusual. It happens on occasion.

Needless to say, at some point this gap has to be corrected. Either one goes down or the other goes up.

If those two explanations are not sufficient, I can always fall back on the old joke about economists. What's an economist? That's someone who makes erudite forecasts and then later on explains in that same erudite manner why those forecasts have been inaccurate.

It's very difficult to make forecasts in a market that is all but normal, definitely not textbook. As investors, we always have to be mindful that things change along the way. Will we avoid recessions? I don't know. But I would not be cocky about it because share prices have rallied.

James: Let's dig a little deeper into what I think is a good read on how you're feeling about markets. Twelve months ago, you were holding 30% in cash. When we last spoke in August, that had reduced to around 20%. What's your cash position now and what's the reasoning behind it?

Rudi: I have done remarkably little. I checked this morning, the cash level (in the All-Weather Model Portfolio) is slightly below 18%. From memory, the last thing that happened was buying extra shares in NextDC ((NXT)) when the share price looked ridiculously low. The Portfolio has done nothing else. The reason for that is that I remain skeptical about the fundamentals underneath this rally. The other reason is I expect this reporting season to be brutal at times, and this means you can jump on opportunities.

James: You mentioned you hold a healthy level of skepticism. What are some of the reasons? What are the big things that support your position?

Rudi: Because it's such a slow, ongoing process. Maybe the best comparison to make is with an example from real life. If one asks the billionaire and the homeless guy how did you end up where you did? They usually give the same answer: it happens very slowly and gradual for a long time, and then all of a sudden it accelerates.

My suspicion is we are in a similar process. We're all getting very optimistic because consumer spending is holding up and company results are not falling off a cliff. But central banks continue to tighten and the full impact from last year's rate hikes still has to come through. I think time will come when we might see things deteriorate rather rapidly.

I have a suspicion this is also the view of central bankers, which is why the Federal Reserve is injecting liquidity in the system, and China's doing the same.

As I said earlier, yes, share prices can rally and investors are taking a big leap in that fundamentals will catch up, but there are some big question marks that still need to be answered. To my surprise, which I suspect has also surprised many locally, the increase in the RBA cash rate has not yet been fully passed on by the banks to mortgage holders. Let's see what the impact will be when that happens.

James: Nearly every sector is in the green this year. Last year was effectively all about materials and energy. Small caps have also been resilient. What's your interpretation of these moves? Do you think the market is now looking through the great hiking cycle you are referring to?

Rudi: I think the big rally can partially be explained by market positioning. Many an investor last year was positioned for much worse times ahead. Forecasts were for a very tough first quarter, with improvement likely further out. This rally has now put everything on its head. Some people might draw a direct correlation with central banks and liquidity.

The market is supposed to be forward looking, but it's not perfect in what it does. Human nature, how we are built and operate, is that we become optimistic when share prices go up, but share prices arguably were quite beaten down. So from the moment share prices start moving upwards, money starts flowing in.

The current situation requires that fundamentals catch up with prices. Either that, or share prices have to come down. We will see both in February, and that process can be brutal.

James: We've had a few early reports and as you alluded to, the trend has generally been for negative market responses despite what looked from your analysis and your reading relatively okay results. Can you explain what you've observed and how you think that plays out through the rest of the season? Maybe you can give a couple of examples?

Rudi: I think there's a big difference between the laggards and those companies that have performed well, either in the past weeks or throughout last year. That second group, I think, is now being treated more harshly by investors. You saw that with results from the likes of Nick Scali ((NCK)), ResMed ((RMD)), maybe even Amcor ((AMC)).

There have been a few exceptions, such as Janus Henderson ((JHG)) and Suncorp Group ((SUN)). Suncorp hasn't genuinely participated in last year's market and it is now getting the benefit of the doubt. While others are basically being punished for the little things that may not be perfect. Sometimes this comes down to cost inflation, which is very difficult to forecast from outside the business. Not even management teams themselves can often put a finger on what is likely to happen.

This is not something that just applies to financials or industrials, or healthcare, it applies across the board. In January we saw production reports coming out and many mining companies showed difficulty with containing costs. We've seen few mining companies update early in February. One is an iron ore miner (Champion Iron ((CIA))) and the other is IGO ((IGO)). In both cases share prices weakened. In both cases cost inflation was one of the key ingredients.

This signals it's very difficult to know in advance how investors will respond to financial results.

James: Let's talk some names. Which are the companies you are expecting to deliver strong results, which we don't know whether that's a good or bad given how the market is responding. But tell me some of the names that you're interested in, and follow closely?

Rudi: I think it's important to emphasise the dynamics for this season will be different from what normally applies. What happens usually is that if you're surprising to the upside, you get rewarded. Your share price outperforms sometimes for up to four months. And the opposite holds true as well: you disappoint and that can linger for months.

I think this time around dynamics will be different because we have that Sword of Damocles hanging in front of the market that things might still look good right now, but what about the second half? What about the third quarter?

Having said so, because of the work I do at FNArena, I see a lot of research passing by and that allows me to pick up when sentiment clearly improves towards a given company. Over the past few weeks sentiment has noticeably improved for CSL ((CSL)), also a laggard from last year as the share price hasn't done much. This is why the CSL share price is no longer around $270.

Another stock for which sentiment has improved is Telstra ((TLS)). Last time Telstra actually increased its dividend and very few were anticipating that. It appears from research since then that, overall, dynamics for the telecom sector on the ground have only further improved. Indications are this might further improve in the second half and beyond.

Why is this important? Because if we are preparing for tougher times ahead, then companies like Telstra will become more attractive, because they move in the opposite direction operationally.

Next, the company I already mentioned, Suncorp, is widely regarded as the undervalued insurance company. This doesn't explain everything, but it does explain why this insurer can release a wishy-washy result and the share price goes up. I would be surprised if that share price does not keep on going up in the next few weeks, or months.

Another interesting thing to point out about last year's laggards, and this is a comparison that very few investors make, is that we all get excited about copper and lithium as they are, apparently, in a long term beneficial trend. So we're more than just excited about this prospect and prepared to own those companies for the longer term.

It's not too far out of the ballpark to make a similar comparison to many of the high quality, sustainable growers in Australia who each have a super-cycle that helps and supports them. That has helped those companies over the past decade and it will continue to help them in the years ahead.

Many people still have to get their head around this. Today's opportunity in the share market is not necessarily with PE ratios on three, or eight, or thirteen. The opportunity can be with a stock that is trading on a PE of 30 and beyond. Now we are talking about REA Group ((REA)), Seek ((SEK)), Carsales ((CAR)), even Pro Medicus ((PME)), TechnologyOne ((TNE)), CSL and ResMed, Breville Group ((BRG)) even, and Goodman Group ((GMG)).

Some investors have this misconceived idea these companies have not yet de-rated, but they have. We had a massive de-rating of multiples last year, but it hasn't hit every segment of the market in the same way. There's an illusion that a stock like CSL, which essentially moved sideways, hasn't de-rated, but it has. Last year was a big bear market which only didn't show up at the index level in Australia.

I'll be definitely watching these stocks, in particular as they have participated in this year's strong rally. I wouldn't necessary jump on board at current levels, but if weakness kicks in at some point, I am certain I am not the only one who's looking to get on board.

James: Final question: what does it take for you to reduce your cash to, say, 10%, or lower? Is it down to share price movements or an external factor that increases your confidence that we've moved through the worst of the impacts from the tightening cycle?

Rudi: It will probably be a combination of the two. Confidence should not necessarily come from how markets behave. But it's difficult because the market doesn't always cooperate, it doesn't always present the opportunities when people would like to see them.

Assuming equities don't continue rallying, the market has two choices; either move sideways for a while, or revisit the low. In the second scenario, hopefully we'll all be more keen to allocate more money than in the first. But we can only make assumptions and the market will ultimately decide where the opportunities come from, and how to allocate one's money. We have to be flexible.

James: Thanks for coming in today. Always good to catch up.

February: Brutal And Underwhelming, So Far

It seems my pre-season prediction of an extra-brutal results season this February is being confirmed on a daily basis.

On Monday, as I write this week's Weekly Insights, shares in both BlueScope Steel ((BSL)) and nib Holdings ((NHF)) are down in double digit percentages following the release of financial results that will lead to analysts lowering their estimates.

It is easily forgotten by investors, but when companies release financial results the main action doesn't actually revolve around what those numbers look like. It's all about the impact on future projections. And on this account the season thus far has certainly underwhelmed.

As reported by Barrenjoey's data and quant analyst Jason Swinbourne, most financial results have led to negative changes to analysts' forecast numbers with profit forecasts upgraded in 14% of cases but downgraded in 25% of cases.

And while Australian boards in particular tend to opt for positive compensation through a higher dividend for shareholders, even on this account the numbers thus far do not look great: 15% upgrades versus 24% downgrades.

Inflation is having a positive impact on top line revenues with sales numbers triggering upgrades in 19% of releases against only 11% downgrades, but inflation is also present through higher costs, and clearly, margin pressure is omnipresent.

It is Monday, February 20th, but the FNArena Corporate Results Monitor has barely passed the 100 mark (out of an estimated 350 reports by month's end).

It begs the question whether one shouldn't hold back in drawing any conclusions just yet, but many an institutional investor looks at the market, and corporate trends, in terms of market capitalisation. Here the percentage has already risen above 60%. By Friday, it will be at 96%.

One difference to note is that reporting seasons in the past tended to start off on a positive note, but this hasn't been the case recently and it certainly has not been the case this month.

Witness, for example, how price targets after the first 107 reports have barely moved, in aggregate. Up until February last year, price targets used to rise following detailed market updates, sometimes up to 7% on average (!), but no more, it seems.

The numbers speak for themselves:

Movements in aggregate price targets:

-February 2022: -1.40%
-March-July 2022: -7.40%
-August 2022: -3.0%
-September-January: -2.50%

February, or so it appears, is not going to break that trend and catapult corporate Australia back to the positive days prior. On FNArena's assessment, 33 companies (30.8%) have disappointed, with 31 companies (29%) beating expectations and the remaining 43 (40%) performing in line.

Compared with historical data going back to August 2013, 'misses' are running above average and 'beats' below average. Not the kind of combination that leads a share market to a new all-time high.

Analysts at Macquarie summed it up as follows: "We still think it is hard to make a bull case for stocks when the Fed/RBA are likely to tighten further causing a rise in real yields that pressures already high PEs and we are in an EPS downgrade cycle".

Macquarie thinks net disappointments in dividends might indicate cautious boards preferring to hoard cash ahead of uncertain conditions.

In many cases, inventories are higher than forecast, which implies slowing underlying momentum but also highlights the risk to earnings for the rest of the year.

Reporting season analysts at UBS see plenty of signals of  "earnings exhaustion". It is clear, concludes UBS, the analyst community is seeing an economy past its peak. Earnings estimates are falling for FY23 and FY24.

In contrast, a number of CEOs remains unwilling to share the analysts' view, UBS observes. Some companies are missing forecasts for the first half but staunchly sticking with their prior guidance for the full financial year.

UBS thinks this is where the next set of corporate disappointments might come from. With the local economy already losing momentum, compensation through accelerated growth in the second half might prove a tad too ambitious for companies.

Companies that need a much better second half if they are to meet their own, unchanged guidance, include Origin Energy, AGL Energy, Corporate Travel Management ((CTD)), Domain Holdings, Fletcher Building ((FBU)), Magellan Financial, Lendlease, Pinnacle Investment ((PNI)), Suncorp Group ((SUN)), NRW Holdings ((NWH)), Southern Cross Media ((SXL)), Breville Group ((BRG)), Computershare ((CPU)), Super Retail ((SUL)), and Bapcor ((BAP)).

The one sector that has bucked the trend for negative earnings impact this month are the insurers with both Suncorp and QBE Insurance ((QBE)) receiving calls for ongoing re-rating post their financial updates.

Shareholders in Insurance Australia Group ((IAG)) will be hoping some of that positive sector sentiment might also drag the local industry laggard along.

On UBS's observation, positive momentum for insurers contrasts with the banks for which February has marked a shift in general market sentiment, with investors now focusing on bad debts and intensifying competition.

Hence why CommBank's ((CBA)) all-time record profit result triggered a sell-off for the broader sector that has turned the Australian market into an underperformer versus offshore peers in February.

The stand-out sector this month are domestic cyclicals, posting much better-than-feared operational performances as consumers have proven much more resilient with their spending, but Macquarie warns investors should not extrapolate because the impact from RBA rate hikes, the rising cost of essentials and falling house prices is yet to be felt.

Regardless, as things stand today, domestic cyclicals are enjoying net upgrades to forecasts, as financial results have mostly surprised ('beaten') and share prices have on average outperformed even when financials were a 'miss'. (Go figure!)

In terms of individual company reports, one of my personal observations is that many a market laggard is not rewarding shareholders' patience this month. Here investors might take note of Macquarie's observation that companies that delivered a 'beat' in either of the last two halves are more likely to post another 'beat' for the December half.

In similiar fashion, reports Macquarie, companies that missed in either of the past two halves, are prime candidates to miss again this month.

For evidence for Macquarie's thesis, see Orora ((ORA)), Audinate Group ((AD8)) and Sims ((SGM)) for positive 'beats' and Treasury Wine ((TWE)), Lendlease, Ansell ((ANN)), Southern Cross Media ((SXL)) and Corporate Travel Management for the follow-through disappointments.

I note all of AGL Energy, AMP ((AMP)), Aurizon Holdings ((AZJ)), Baby Bunting ((BBN)), Fletcher Building ((FBU)), Healius ((HLS)), Iress ((IRE)), Lendlease, Magellan Financial, Southern Cross Media and Temple & Webster ((TPW)) have simply added more punishment for long suffering shareholders this month.

Sometimes a cheap looking share price really is "cheap" for a very good reason.

On the other end of the ledger, one of the most remarkable phoenix-like resurrections has thus far come from autoparts manufacturer GUD Holdings ((GUD)) whose relatively unremarkable interim performance nevertheless triggered a 20%-plus rise in the share price, with analysts predicting there's more of the same ahead as long as there's no unexpected negative development.

As with almost every reporting season, the usual High Quality stalwarts keep on keeping on, releasing solid operational performances, not always necessarily rewarded with an uplift in share price.

In many cases, the only possible gripe investors can throw at these companies is a mumble about inflated valuations, which your typical value-investor almost every time does.

High Quality companies that yet again showed off their intrinsic resilience over the past twenty days include Amcor ((AMC)), Carsales ((CAR)), Cochlear ((COH)), CommBank, CSL ((CSL)), Goodman Group ((GMG)), JB Hi-Fi ((JBH)), Pro Medicus ((PME)), REA Group ((REA)), ResMed ((RMD)) and Wesfarmers ((WES)).

Another noteworthy good news story remains that of Telstra ((TLS)) whose share price bottomed at $2.65 in October 2020 ($4.21 today).

Since then, market dynamics have only improved and, judging from last week's release, the positive underlying trend continues. Note analysts are now projecting ongoing increases in Telstra's dividend payments.

Two years ago Telstra paid out 16c. That became 16.5c in FY22 and is now expected to lift again to 17c by August.

For next year, some analysts are prepared to pencil in 18c, potentially followed by 19c in FY25. UBS is prepared to put the forward trajectory in acceleration forecasting a dividend of 19c in FY24, rising to 22c in FY25, then 23c in FY26 and 26c in FY27.

Telstra shareholders looking forward to multiple years of higher dividends. That really is one change Australia hasn't witnessed in a long while.

Another BIG change is analysts now setting price targets as high as $18.70 for QBE Insurance shares; a level that hasn't been seen in more than a decade.

February's Sobering Reality Check

Australian businesses are doing it tough. Maybe the easiest way to back up that statement is via FNArena's Corporate Results Monitor.

By late on Friday, the Monitor had aggregated 241 corporate results of which 31.5% (76 results) had managed to beat expectations and 29.5% (71 results) had failed, with the remaining 39% (94) performing in line.

Price targets on average had increased by 0.23% but in aggregate 241 price targets in total have not moved at all (-0.03%).

Share price-wise, most reports have triggered selling pressure and the major indices are down more than -3.5% for the month on Monday. All it takes from here is one or two negative trading sessions and those sharp gains booked in January will be gone.

If we zoom in on the ASX50, of which a total of 41 members have reported, the numbers look decisively more encouraging; 41.5% (17 companies) have beaten market forecasts and only 26.8% (11 companies) missed the mark. On average, price targets have lifted by 1% with an aggregate increase of 0.93%.

Comparable numbers for the ASX200 look a lot worse. Of the 137 companies reporting to date, which includes the 41 from the ASX50, only 30% (41 companies) released a 'beat' with 33.5% (46 companies) disappointing. While the average price target for the ASX200 has increased by 0.31%, in aggregate targets have gone backwards by -0.21%.

To create a proper framework around those numbers, we first have to acknowledge the trend since 2013 is that February usually allows for a larger percentage of 'beats' in comparison with August. For example: the two previous February result seasons of 2022 and 2021 saw total 'beats' of respectively 43% and 47%.

If that 31.5% of beats this month holds up when the final calculations are made later this week, it will be near the lowest percentage for any February on par with 2020 and 2014 (31%). Both those years were challenging times for the local share market.

Disappointments running at 29.5% is not out of the ordinary. Last year, the percentage was 36%, the year prior only had 13%. This year the percentage in misses is high, though not extraordinary.

What has stopped is that results seasons add meaningfully to corporate valuations and thus to broker price targets, as also signalled last week. Ever since we left calendar year 2021 behind us, corporate results seasons are no longer providing a positive outcome for price targets for individual ASX-listed entities.

Yet, at the beginning of this month, major indices were but a whisker away from setting new all-time record highs. Go figure. Maybe, if we take those 2023 highs as our starting point, maybe then the February results season has provided investors with a reality check?

Like a cold shower on a hot and sweaty mid-summer day?

Aussie Battlers Showing Resilience

Uninspiring and underwhelming, but February 2023 hasn't been an entirely negative exercise for Australian investors.

Plenty of corporate releases are showcasing resilience, growth, bonus dividends, share buybacks and fresh acquisitions, even if in some cases this was combined with the inability to meet or beat analyst forecasts.

As the Monitor data indicate, the good news and the resilience are mostly coming from the big end of the market.

The latter shouldn't surprise as the difference came often down to the degree of pricing power and cost growth containment; two factors more often found among larger-sized companies.

Analysts at Martin Currie identified three other key factors this month: leverage to rising interest rates, ongoing tailwinds from societies re-opening post covid lockdowns, and resilient (but softening) spending by consumers and businesses.

Positive stories that come to mind this month are insurers and their brokers for the positive interest rate correlation, QBE Insurance ((QBE)) and Suncorp Group ((SUN)) in particular, but also AUB Group ((AUB)), Steadfast Group ((SDF)) and PSC Insurance ((PSI)) as the insurance brokers.

Areas of strength thus far have shown up through travel and resources sector contracting, though I would most definitely include many of the High Quality sector leaders on the ASX who, it has to be pointed out, only rarely disappoint fundamentally. This season many of those companies exhibited resilience, quality and growth where many others were unable to.

Regular readers know the companies I am referring to: the list includes Goodman Group ((GMG)), REA Group ((REA)) and Macquarie Group ((MQG)), as well as Pro Medicus ((PME)), HUB24 ((HUB)), Ebos Group ((EBO)), Carsales ((CAR)), Seek ((SEK)), Woolworths ((WOW)) and CSL ((CSL)), among others.

Analysts at Morgan Stanley, who keep a close tab on performances by High Quality and Low Quality companies report the pendulum this month has decisively swung in favour of the former, i.e. High Quality is outperforming the local trash.

Having been an avid market watcher for more than two decades, I can confirm High Quality stalwarts mostly perform well during most seasons. There might be a message in here for conservative investors with a longer term horizon.

For ongoing tailwinds from re-opening borders, there's probably no better example than Qantas Airways ((QAN)), while many a discretionary retailer has proved the doubters wrong this month. Discretionary retailers, alongside the automotive sector, stand out through resilience in February. Yet, UBS probably summed it up best as far as most investors' focus is concerned:

"the economy companies were in is not the one they are entering".

Underneath the daily share price moves and the headline numbers, UBS strategist Richard Schellbach and associate analyst Sparsh Polepalle spot "waning" earnings momentum with the local analyst community gradually coming to the conclusion that operational momentum for corporate Australia has already peaked.

What lays ahead are more and tougher challenges as economies slow and central bankers are still hiking interest rates.

On UBS's assessment, companies most worried about a possible hard landing for the Australian economy later this year are mostly operating in the building materials sector, in steel and in traditional media. Early signals of consumers changing their spending habits came from big ticket retailers, but also from supermarkets and food producers.

Sectors already doing it tough, judging from this month's market updates, include food producers, builders and real estate companies.

No More Mr Nice Guy

A different thesis has been put forward by analysts at Morgan Stanley who, after observing how share prices in companies that disappoint are often receiving a harsher-than-usual punishment, conclude the end is here of the "era of forbearance".

Investors are no longer prepared to give companies the benefit of the doubt, says Morgan Stanley. Patience is waning. Punishment is becoming the response du jour in case expectations are not being met.

Anecdotal examples support this thesis. On Friday, Mineral Resources ((MIN)) released what appeared a half-yearly set of numbers that fell short of analysts' projections, but the share price recovered quickly during the day. On Monday, however, the shares are down in excess of -6% as I write these sentences.

Earlier in the season, dividend disappointment from BHP Group ((BHP)) elicited a similar quick recovery in the share price, but BHP shares are now well below the $50 at which they started off at the beginning of the month. By the way: I am by no means suggesting these moves are 100% free of macro-economic affect.

Best performing sectors this month, on Morgan Stanley's analysis: insurance, staples and healthcare. Average punishment for results that miss expectations thus far this month has been a retreat in the share price of -3.9% – this is the largest sell-down on the broker's data since the -5.2% recorded for August 2016.

Equally interesting, the same data also show this month's reward for companies that beat forecasts has been below average with share prices only adding on average 2.2% on the day of result release. In most seasons, the data show, rewards tend to be higher than the average punishment.

Not this month.

Share prices from companies that downgraded guidance have been punished with an average sell-down of close to -10%, report the analysts, while companies that upgraded guidance have only seen their share prices lift by 2%-plus on average. Those who maintained guidance have on average seen a slightly negative response.

In equal fashion, extreme negative responses have been larger than positive rewards. Morgan Stanley lines up Red 5 ((RED)), Temple & Webster ((TPW)), Aurelia Metals ((AMI)), Domino's Pizza ((DMP)), St Barbara ((SBM)), Lake Resources ((LKE)), Jervois Global ((JRV)), Star Entertainment ((SGR)), Westgold Resources ((WGX)) and Adairs ((ADH)) whose share prices lost between -36% and -20% in February while on the positive side only two share prices gained more than 20%; Arafura Rare Earths ((ARU)) and GUD Holdings ((GUD)).

The large number of negative results ('misses") is seen as an obvious stand-out this month with only result seasons in 2019 and 2020 showing similar numbers – those were tough times for Australian businesses, probably best remembered through the fact that back then energy companies and the banks cut their dividends pre-covid epidemic.

Factors most cited by company officials to describe the challenges facing their business are cost pressures/inflation, higher interest rates and ongoing labour shortages, as also shown on the graphic below by Martin Currie. Gone are the many references to supply-chain pressures and the energy crisis that dominated in previous seasons.

Government intervention is a new negative threat that featured this month.

Cuts: Scissors Versus Chainsaws

Cuts to earnings forecasts are dominating analyst activity in February. Only two sectors have seen estimates rise: consumer staples and financials with the added remark that forecasts for banks are falling, it's the insurance companies that are providing positive offset.

Those who happen to read the Australian Financial Review (AFR) already know market updates this month coincide with early on-the-ground indications the banking sector is preparing for savage, margin-reducing competition for the wall of fixed-interest mortgages that is about to expire, looking for refinancing in the months ahead.

Bank share prices have been a major drag for the local market this month.

Sectors suffering the heaviest downgrades to forecasts are energy, materials (i.e. miners) and communication services. This applies for both FY23 and FY24 forecasts.

Assuming no further cuts, which is probably optimistic, the ASX200 is forecast to grow average EPS by circa 4% in FY23. The numbers for FY24 and FY25 are close to zero. As per usual, the dispersion behind these averages is enormous with strong growth projected for industrials, info tech and utilities and heavy deterioration for energy (in particular post the current year) and materials.

In between sit sectors like consumer discretionary, staples, healthcare, real estate and financials with steady-as-she-goes EPS growth projections.

Starting from current consensus forecasts, the valuation of the Australian share market, both as expressed through the average PE ratio and the average dividend yield, is trending around long term averages on respectively 14.5x (approx) and 4.2%.

Plenty of bonus dividends have been announced this month, which is the predictable response from Australian boards when times get tough as this is usually their idea of compensating shareholders, but investors might nevertheless pay heed to the fact there have been plenty of disappointments as well, not in the least because large cap miners can no longer keep up with the elevated payouts from the boom times in 2021 and 2022.

As shown in the graphic overview below, as per Martin Currie's research, the end outcome from the February reporting season has been positive for sales projections, but negative for profits (EPS) and also negative for dividends, albeit only in a modest fashion.

As the numbers have been updated for FNArena's Corporate Results Monitor late afternoon on Monday, the pendulum has swung back towards more disappointments; out of the updated total of 268 corporate reports, more than 30% (81 companies) have been labelled as a disappointment, while slightly less companies (80) have beaten market expectations.

The average price target has now increased by 0.10% but in aggregate targets have gained 0.43%. The difference between ASX50 companies (now 43 having reported) and the ASX200 (143 companies) remains noticeable.

Heavy share price falls on Monday for Appen ((APX)), down -15%-plus, City Chic Collective ((CCX)), down almost -12%, and Downer EDI ((DOW)), down -23%-plus, suggest this February results season continues to be one of the most brutal in recent times.

As per my observations in previous weeks: this season has been in particular brutal for investors who held on to prior disappointments in the hope of better times (finally) arriving.

No doubt, many holding on to shares in Appen, Baby Bunting ((BBN)), City Chic, EML Payments ((EML)), GWA Group ((GWA)), Pacific Smiles ((PSQ)), Pepper Money ((PPM)), Southern Cross Media ((SXL)), Temple & Webster ((TPW)) and the like had thought (hoped?) things could not genuinely get a lot worse.

Long-time strugglers such as AMP ((AMP)), Lendlease ((LLC)), Magellan Financial ((MFG)) and Platinum Asset Management ((PTM)) equally found providing relief for shareholders too big of a challenge this month, yet again.

As economic conditions are likely to only get worse from here onwards, investors might find many of the recovery-stories-in-waiting require a lot more patience in 2023.

February Trends, Winners, Signals & Losers

It is often said that investing in the share market, ultimately, comes down to corporate earnings – where earnings go, share prices must follow.

This narrative, however, covers only 50% (at best) of what moves and guides share prices. The other half are forecasts and expectations, which in large part are guided by macroeconomic prospects and events.

The first two months of calendar year 2023 stand out through a marked discrepancy between the two major forces that drive equities and general risk appetite.

On one hand, there's optimism to be had from a resurgent China and the fact most countries seem to have avoided the worst from what looked like an unavoidable energy crisis. On the other hand, companies are clearly struggling with headwinds and slowing momentum, and only a brave soul would call the end of the impact from central bank tightening today.

The macro versus micro divergence has turned February into the proverbial cold shower that brought back some realism into what appeared a lot of exuberance that previously underpinned January's strong rally. February's negative performance was never going to be solely about corporate hits and misses, of course, with global bond markets and evolving inflation forecasts equally making an impact.

But February wasn't great – not when we zoom in on corporate profits, underlying trends and margins; even the most bullish among the bulls might have to concede as much. February has turned into a thorn in the side for all those forecasters who believe the low is in for markets and a new bull market is taking shape.

I am by no means suggesting such predictions are 100% guaranteed to be incorrect, but historically a healthy bull market is supported by both macro and micro forces.

With corporate profit estimates falling prior to and during February, and expected to fall further in the weeks and months ahead, it seems like all the good news needs to come from the macro side, without the micro providing yet another cold shower moment in August or beforehand.

Viewed from this perspective, the next US quarterly results season starting in mid-April and local confession season in May-June might prove more important than usual. In the US, many a profit margin remains high by historical standards and any "normalisation" that is yet to occur can potentially accelerate the pressure on historically elevated valuation multiples.

In Australia, a notable number of companies missed market forecasts with their interim performance while management teams at the helm refused to change full year guidance. As the numbers for FY23 become clear(er) approaching June 30, the big test locally will be whether such companies have to concede or not.

On stockbroker Morgans' data gathering, some 49% of companies are now depending on a second half skew compared with 25% in pre-covid times.

Companies that could be at risk of a profit warning during confession season in Australia include Challenger ((CGF)), Corporate Travel Management ((CTD)), Credit Corp ((CCP)), Domain Holdings Australia ((DHG)), Domino's Pizza ((DMP)), Flight Centre ((FLT)), Healius ((HLS)), Lendlease ((LLC)), Medibank Private ((MPL)), News Corp ((NWS)), Nine Entertainment ((NEC)), REA Group ((REA)), and Sims ((SGM)), analysts at Macquarie have suggested.

A cautious Morgans is looking towards small cap companies as being most at risk.

Results season analyst at PAC Partners, Shane Bannan believes the likes of Accent Group ((AX1)), Breville Group ((BRG)), Nick Scali ((NCK)) and Super Retail ((SUL)) are likely to be "cruising for a bruising" as covid response momentum won't be sustained and valuations look too high for when the slowing in momentum arrives.

Cleanaway Waste Management ((CWY)) and Data3 ((DTL)) are equally overpriced, on Bannan's assessment.

February – The Numbers

Reporting seasons never consist of only winners or losers; every season delivers a mix. Viewed from a positive angle, 90% of Australian companies reporting in February were profitable and after strong growth in dividend payments last year and the year prior, the retreat in total dividends announced last month was really quite minor, considering big payers BHP Group ((BHP)) and Rio Tinto ((RIO)) had to halve their payouts.

All in all, total dividends of circa $47.8bn fell some -$1.4bn short of analysts' estimates prior the February season, Macquarie reports. On Janus Henderson's numbers, total dividends paid out in Australia reached an all-time high in local dollars in 2022 for a total of $97.7bn.

Banks and mining companies were responsible for more than three quarters of that new record, with BHP the world's number one and Rio Tinto the number seven in terms of total dividend paid to shareholders.

In February, compensation came through via oil and gas producers, coal producers and insurance companies, but still, on CommSec's calculations some 20% of companies lowered their dividend in February, including Adbri ((ABC)) whose shareholders for the first time since 2000 will not receive a payout for the six months to December 31.

Twenty percent means one-in-five, which is probably a better indication of how tough the general on-the-ground experiences are for corporate Australia. In aggregate, EPS forecasts for the ASX200 only fell by less than -1% in February, but Macquarie analysts point out estimates have now fallen by -7% on average from their peak in 2022. The first seems benign, the second number suggests significant pressure to the downside.

On FNArena's assessment, more companies (32.5%) missed and disappointed in February than those who beat and surprised positively (29.5%). When put in historical context: it is quite rare to see the larger percentage held by the negative. In all the February results seasons since 2014, this had not happened prior.

The closest February ever was in 2019 when beats and misses equaled out at 33% each. The only August season ever to see misses outnumber beats came along later that same year; 25% misses against 24% beats. With the assistance of Harry Hindsight, we know now back in late 2019, pre-covid, the Australian economy looked genuinely sick.

Two of the Big Four Banks cut their final dividend before all four had to do it in the following year.

One stand-out observation this year is that investors were much less prepared to grant companies the benefit of the doubt, which also has been one major contributor to February's negative performance. Simply reporting in line and sticking with prior guidance still caused share prices to retreat slightly, according to Morgan Stanley's data analysis.

The strong rally off the October lows required companies to outperform forecasts, but those who managed to do it were only rewarded with an average share price gain of 2%. Those who missed, on the other hand, got punished on average by close to -10%.

Most market analysts have now pared back average EPS growth for this year (FY23), as well as the two following years, below Australia's long-term average of 5.5%, but at face value numbers are dependent on forecasts for the ever so volatile miners and energy companies.

Regardless, an oft repeated factor among those with a more cautious outlook is that EPS forecasts in Australia, as well as in the USA, most likely remain in a downtrend for longer, which makes it difficult to see a fresh, sustained bull market for equities on the horizon.

Another stand-out observation from February is that large cap companies are performing (much) better than their smaller cap competitors. One need not look any further than the 44 ASX50 reporters in February of whom nearly 41% surprised positively and only 29.5% fell short.

For the 159 reporters from the ASX200 (also including those 44) the numbers are respectively 28.3% beats and 33.3% misses.

Sectors Defying Cautious Forecasts

Two market segments defied negative forecasts in February: consumer-spending oriented companies, led by discretionary retailers, and real estate investment trusts (AREITs).

Property values have held up even in the face of aggressive tightening by the RBA and central bank peers globally, and analysts are not quite sure what to make of it. Many a REIT is carrying a lot of debt, so there's a growing headwind through servicing this debt, while new financing facilities are becoming more costly too.

Sector pressures are expected to remain negative for owners of office buildings while consumer spending, or its outlook, keeps a question mark over others.

Citi's team of property sector analysts believe companies and trusts able to grow income will enjoy valuation support. They prefer Goodman Group ((GMG)), Region Group ((RGN)), Charter Hall Retail REIT ((CQR)) and Abacus Property Group ((ABP)).

Macquarie's preferences among AREITs include Dexus ((DXS)), GPT Group ((GPT)), Goodman Group, Arena REIT ((ARF)), HomeCo Daily Needs REIT ((HDN)), Dexus Industria REIT ((DXI)) and Qualitas ((QAL)).

Retailers and consumer companies performed each way in February, also illustrated by the fact that GUD Holdings ((GUD)), Flight Centre ((FLT)) and Eagers Automotive ((APE)) were among the month's best performers on the ASX, while Domino's Pizza ((DMP)), Temple & Webster ((TPW)) and City Chic Collective ((CCX)) were among the worst performers.

Recent analysis by ANZ Bank economists suggests Australian households are not so much reducing their spending as they are redirecting it between discretionary categories. Entertainment and travel are "hot" while non-food retail is weak, and weakening. In line with most forecasts out there, ANZ Bank economists are still bracing for "material impact" from RBA tightening later in the year.

The fixed rate mortgage roll-off everybody has been talking about for more than a year will only genuinely start rolling off from April onwards.

Meanwhile, research by Roy Morgan suggests an estimated 1.19 million mortgage holders, circa 24.9%, were at risk of mortgage stress in the final three months of last year. That number is the highest for over a decade since June 2012 and is now significantly above the long-term average of 22.8% stretching back to early 2007.

On Roy Morgan's data, the number of mortgages at risk increased by 486,000 in 2022. The number of mortgage holders considered 'Extremely At Risk' increased to 710,00 in the three months to January, above Australia's long-term average of 659,000.

February Winners

Stockbroker Morgans has selected CSL ((CSL)), Endeavour Group ((EDV)), Lovisa Holdings ((LOV)), Qantas Airways ((QAN)), QBE Insurance ((QBE)), Tourism Holdings ((THL)), Ventia Services ((VNT)), and Wesfarmers ((WES)) as its Best Ideas from the reporting season just past.

PAC Partners' Bannan has selected Ive Group ((IGL)), Shine Justice ((SHJ)), Codan ((CDA)) and SG Fleet ((SGF)).

Macquarie analysts report sector winners are insurers, staples retail and packaging; all are defensive sectors in which the broker's portfolio has an Overweight allocation. The worst sectors in reporting season turned out to be energy, consumer services, media and capital goods.

Not one single company in each of the latter four baskets enjoyed material EPS upgrades, reports Macquarie.

Morgan Stanley's Model Portfolio was hit hard during the month through a free-falling Domino's Pizza share price, but the stock has remained included as at today. Its quant team confirms High Quality stocks are now outperforming their low quality brethren on the ASX for a third month in succession.

February Results: Final Notes & Observations

The things we can control, and the ones we don't…

I know many among you value the service we built here at FNArena (and new additions are in the works). Truth is, FNArena and its multitude in data and tools equally forms an integral part of my personal daily routines and market observations & insights, so when power problems at the datacentre makes accessing the website no longer possible, I too am robbed of my primary tools and data.

Hence why last week's promise to zoom in on the February performances of All-Weather Companies and their outlook has been postponed until next week.

So for now… let's look into the final observations from other expert voices.

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One of the segments that surprised in a positive manner in February were contractors and engineers servicing mining, energy companies and infrastructure projects. As pointed out by analysts at Macquarie, when the dust settled over the February results season, the sector had generated more 'beats' than 'misses', which was quite rare this time around.

Two of the stand-out performances were delivered by Ventia Services ((VNT)) and Seven Group Holdings ((SVW)), the broker believes.

The most negative disappointment was reserved for Downer EDI ((DOW)).

Macquarie acknowledges the macro outlook remains supportive for the sector, with spending on mining and infrastructure projects unmistakably supportive, but the broker warns investors should not ignore the 'micro', i.e. the company-specific dynamics and characteristics.

Macquarie's sector coverage is limited to six companies, and only three are rated Outperform: Ventia Services, Seven Group Holdings and Worley ((WOR)).

Monadelphous ((MND)), Downer EDI and NRW Holdings ((NWH)) are all rated Neutral.

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All in all, market strategists at Wilsons saw a "mixed bag" in corporate results in February, with pockets of resilience that should prove their value for investors as the earnings downgrade cycle unwinds further.

Key themes from the season that should be on investors' radar, according to Wilsons, include:

-Consumers are tightening their purse strings, although to date they remain selective in where to spend and where not to;

-Costs pressures remain;

-There is to date no sign of spending weakness in tourism or leisure;

-There might be improvement on the horizon for beaten-down housing related exposures.

Regarding the latter, Wilsons continues to hold James Hardie ((JHX)) shares in its Focus Portfolio.

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Stockbroker Morgans changed its sector call for ASX-listed technology stocks in December to Neutral from Underweight and, post the February results season, Morgans remains of the view true Quality will rise to the surface from the sector.

The sentence that sums it up nicely: "We expect that, given the relative value they create, quality tech names should continue to push through price rises with limited impact on demand."

Top picks according to the broker are Xero ((XRO)), nominated before staff layoffs were announced, REA Group ((REA)), and Seek ((SEK)).

Given technology has never been an index mover in Australia, notwithstanding the exchange's initiatives to become the regional hub for technology listings, Morgans has retrospectively built its own index comprised of six high quality ASX-listings. On this basis, the broker believes today's valuations are "fair value", vindicating that Neutral rating.

Share price weakness for Megaport ((MP1)) and Objective Corp ((OCL)) has led to upgrades to Add as the risk versus reward proposition is now regarded as compelling.

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Healthcare analysts at Macquarie have nominated CSL ((CSL)) and aged care operator Estia Health ((EHE)) as the two sector outperformers in February with both results proving materially better than the broker's forecasts.

The sector itself was dominated by margin pressures in February directing sector preferences towards those healthcare companies able to expand margins as the impact from covid and inflation subsides.

Relative to updated market forecasts, Macquarie reports its own margin expansion projections are greater for CSL, Healius ((HLS)) and ResMed ((RMD)), while more substantial margin contraction is still forecast for Sonic Healthcare ((SHL)).

No surprise, Sonic Healthcare is one of two Least Preferred sector exposures, with Cochlear ((COH)) the other nominee.

Most preferred are CSL, ResMed, Healius and Estia Health.

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From the Evans and Partners reporting season review:

"Our base case remains that the domestic economy will narrowly avoid a recession, however the earnings environment is anticipated to be more challenging as global economic activity slows and domestic consumption is curtailed. For these reasons, we continue to look towards high quality businesses with defensive earnings profiles, sustainable dividend yields and/or earnings momentum."

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Healthcare analysts at Jarden highlighted how capital management, including M&A, has become one defining feature for the sector over the past six months. All of CSL, Ramsay Health Care ((RHC)), Cochlear, ResMed and Integral Diagnostics ((IDX)) made at least one announcement during the period.

Looking ahead, Jarden believes Sonic Healthcare, Cochlear and ResMed appear best positioned for more announcements in the months ahead.

Jarden's preferred sector picks are CSL, ResMed, Ramsay Health Care and Integral Diagnostics -the latter two on attractive valuations- among larger cap companies and Aroa Biosurgery ((ARX)) and Telix Pharmaceuticals ((TLX)) for investors with a higher risk appetite (small caps).

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Financial services ex-banks saw lots of 'beats' and 'misses' and Morgans spotted the strongest results from QBE Insurance ((QBE)), Medibank Private ((MPL)), Challenger ((CGF)) and Tyro Payments ((TYR)). Disappointments came from Insurance Australia Group ((IAG)), nib Holdings ((NHF)), Pexa Group ((PXA)) and Generation Development Group ((GDG)).

Morgans' preference lays with (in order of preference): QBE Insurance, Computershare ((CPU)), Suncorp Group ((SUN)), Tyro Payments, Generation Development, Pexa Group, and Kina Securities ((KSL)).

Zooming in specifically on the insurers, Citi shares Morgans' preference for QBE Insurance, but is more circumspect on the different prospects for Insurance Australia Group and Suncorp. Citi still finds Medibank Private post cybersecurity breach "difficult to assess" and has upgraded nib Holdings to Buy on expectations of ongoing growth despite the requirement for further investments.

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Small cap analysts at UBS found the overall quality of financial results weaker in February while also noting large capex projects are increasingly being delayed. Higher cost inflation and interest rate rises are leaving their mark on the analysts' assessment.

UBS likes to refer to emerging companies instead of smaller caps, even though most will never graduate to the ASX100. Irrespectively, the broker's preferences lay with Breville Group ((BRG)), Corporate Travel Management ((CTD)), Hansen Technologies ((HSN)), IDP Education ((IEL)), IPH Ltd ((IPH)), Kelsian Group ((KLS)), NextDC ((NXT)), Nufarm ((NUF)), Ridley Corp ((RIC)) and Webjet ((WEB)).

Also worthy of a positive mention, UBS suggests, are Autosports Group ((ASG)), Infomedia ((IFM)), and Siteminder ((SDR)).

Thematically, the analysts explain, those preferred exposures can be categorised as:

-Defensive Growth (think IPH, Hansen Technologies and Kelsian Group)

-Cyclical Winners (such as Nufarm and Ridley)

-Structural Growers (Breville Group, IDP Education and NextDC)

-Re-opening Beneficiaries (Corporate Travel and Webjet)

As UBS's overview shows, companies enjoying upgrades to EPS forecasts were rather rare in February, with both Nufarm and Webjet among the exceptions (on macro-input since both report in May). Eagers Automotive ((APE)), Autosports Group, Flight Centre ((FLT)), Imdex ((IMD)), Inghams Group ((ING)), Servcorp ((SRV)) and Tyro Payments reported in February and saw analysts upgrading forecasts.

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Over at Macquarie, small cap specialists like to talk about Emerging Leaders. On Macquarie's assessment, the February results season brought out strong top-line performances, of course boosted by inflation, on lower margins and weak cash flows. EPS forecasts were generally downgraded post the season.

Many of such companies are now depending on a stronger second half to please investors and shareholders with the broker highlighting Prospa Group ((PGL)), Flight Centre, Baby Bunting ((BBN)), KMD Brands ((KMD)), Corporate Travel, G8 Education ((GEM)), Emeco Holdings ((EHL)), Maas Group ((MGH)), Corporate Travel, and AUB Group ((AUB)).

Not every H2 skew is treated as a negative with AUB Group included in the broker's Top Picks, alongside Bapcor ((BAP)), Kelsian Group, Monash IVF ((MVF)), Netwealth Group ((NWL)), and Seven Group Holdings.

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And in the end… February 2023 did not deliver the "bloodbath" that was priced in for A-REITs during the third quarter of 2023. Instead, real estate analysts at Evans and Partners saw trusts typically re-affirming guidance for FY23.

Rental income proved typically in line or even slightly better than expected. Those landlords enjoying CPI linkage in particular stood out from the pack, observe the analysts. Asset valuations were impacted, but there was offset through higher rents.

Interest costs are higher, and these will now act as a headwind to future growth for the sector generally.

While valuations seem attractive, Evans and Partners does believe newsflow is likely to remain negative, driven by pressure on asset valuations and increasing cost of capital. While balance sheets in general are considered robust, growth in distributions to shareholders and spending on developments are expected to remain subdued as managers are expected to stick with conservative strategies.

Evans and Partners is inclined to view ASX-listed REITs as long term opportunities. The broker's Top Three of Specialist A-REITs consists of: Arena REIT ((ARF)), HomeCo Daily Needs REIT ((HDN)), and RAM Essential Services Property Fund ((REP)).

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The ever so cautious Macquarie prefers the more defensive exposures among local REITs with sector preferences allocated to Dexus ((DXS)), GPT Group ((GPT)), Goodman Group ((GMG)), Arena REIT, HomeCo Daily Needs REIT, Dexus Industria REIT ((DXI)), and Qualitas ((QAL)).

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Sector analyst peers at Morgan Stanley have become more constructive on REITs with a retail exposure. Most preferred by Morgan Stanley is Scentre Group ((SCG)) which remains the only Overweight-rated among peers. The others are GPT Group and Vicinity Centres ((VCX)); both are rated Equal-Weight.

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Citi's February observations for the sector are not different from the analysts above, but this broker seeks sector safety & outperformance through operators that can grow their income. It is Citi's view that investors will reward those operators with downward protection, otherwise known as valuation support.

Citi's preferred A-REITs are Goodman Group, Region Group ((RGN)), Charter Hall Retail ((CQR)), and Abacus Property Group ((ABP)).

Both GPT Group and Charter Hall Long WALE REIT are seen as presenting "good value".

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The team of sector analysts at Jarden made the most changes throughout February, lifting National Storage REIT ((NSR)) to Buy, while upgrading Goodman Group, Region Group, Charter Hall, HMC Capital ((HMC)), and Charter Hall Social Infrastructure REIT ((CQE)) to Overweight.

On Jarden's rankings of ratings Overweight sits one step below Buy. Abacus Property was downgraded to Overweight from Buy.

Three REITs were downgraded to Underweight: Centuria Industrial REIT ((CIP)), Centuria Office REIT ((COF)), and Stockland ((SGP)).

On Jarden's analysis, earnings are still holding up for the sector, but cash flows are increasingly under pressure. This broker suggests investors should focus on cash flows from here onwards, warning any discounts to net tangible assets (NTA) won't close unless cash flow improves and shows attractive growth.

Rudi’s View: Domino’s Pizza, Newcrest & Qantas

Model Portfolios at stockbroker Morgans have been making slight adjustments as the February reporting season drew to an end.

Exposure to Woodside Petroleum ((WDS)) inside the Core Model Portfolio was scaled back in favour of more shares in Santos ((STO)). More shares were bought in Sonic Healthcare ((SHL)) and in HomeCo Daily Needs REIT ((HDN)).

Worth mentioning: Morgans thought Computershare's ((CPU)) interim result last month disappointing, in particular the underlying core business. The Core Model Portfolio has solely kept its exposure as a quasi-insurance against a longer than anticipated rate hiking cycle, but is now actively on the look-out for better ideas for which the shares will act as a funding source.

Morgans' Growth Model Portfolio has copied the rebalancing between Woodside and Santos, while adding shares in Ventia Services Group ((VNT)) and reducing exposure to Eagers Automotive ((APE)) and Domino's Pizza ((DMP)). The latter action had been taken prior to the release of disappointing financials. The broker's commentary post H1 result is that "faith has been shaken".

Morgans main conclusion from the February results season is that the outlook for discretionary retailers in Australia won't be as bad as the more bearish forecasts expressed elsewhere, with the top three sector favourites consisting of Lovisa Holdings ((LOV)), Super Retail Group ((SUL)) and Universal Store Holdings ((UNI)).

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The All-Cap Model Portfolio at Credit Suisse has decided to reduce exposure to GUD Holdings ((GUD)) and lift exposure to Rio Tinto ((RIO)).

This Model Portfolio likes its key holdings of defensives through shares in Coles Group ((COL)), Telstra ((TLS)), CSL ((CSL)) and Blackmores ((BKL)) which Credit Suisse believes all share similar correlation characteristics. More defensive characteristics are seen in gold companies Perseus Mining ((PRU)) and Regis Resources ((RRL)), plus some long-duration assets via Transurban Group ((TCL)) and APA Group ((APA)).

All in all, Credit Suisse's strategy is built around a solid core of defensives complemented with opportunistic growth plays, which also includes increased exposure to metals and mining.

Key contributors to the portfolio outperforming in February included Hub24 ((HUB)), Fortescue Metals ((FMG)), Seven Group Holdings ((SVW)), Aristocrat Leisure ((ALL)), and Brambles ((BXB)).

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Judging from the latest strategy update by Morgan Stanley, released while the world is fearing more negative news from banks globally, this team of equity portfolio strategists is preferring a more cautious approach.

Morgan Stanley does advocate an Overweight positioning towards Resources, together with Overweight exposures to healthcare and A-REITs. Underweight positions are reserved for Australian banks, consumer-related stocks, and companies linked to the housing sector.

Here the best performing exposures year-to-date are Newcrest Mining ((NCM)), The Lottery Corp ((TLC)), James Hardie ((JHX)) and Goodman Group ((GMG)). Having an Underweight exposure to CommBank ((CBA)) has been beneficial too.

Exposures that have dragged on the portfolio's performance to date include Domino's Pizza, Sonic Healthcare and Treasury Wine Estates ((TWE)).

Both Morgan Stanley and Credit Suisse found the February results season rather disappointing. Both are anticipating market forecasts remain too high and thus more cuts should be expected. Exposure to Resources is predominantly based on China generating positive momentum for the sector.

It is the link to China that has kept Evans and Partners on a slight Overweight allocation to Australian shares, but this broker declared this week its confidence had been eroded by a particularly weak results season in February.

Within this context, I note UBS's core forecast remains for the S&P500 EPS to retreat by -10% in 2023, and for the index to end the calendar year near 3900 as the EPS is projected to improve from this year's US$198 to US$215 in 2024.

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Ahead of the latest bank sector inspired market conniptions, strategists at Wilsons tended to be relatively confident in a positive trajectory for equity markets throughout 2023. It remains to be seen whether they might pare back some of that confidence; we suspect not.

Wilsons' best ideas among ASX-listed equities are Mineral Resources ((MIN)), ResMed ((RMD)), Netwealth Group ((NWL)), IDP Education ((IEL)), and Goodman Group.

The strategists also highlight one speculative idea: Immutep ((IMM)).

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Macquarie's team of TMT analysts (that's Technology, Media and Telecommunication in case you missed the Y2K period of the late 1990s) remains of the view it is still too early to jump on companies with a cyclical bend. The preference thus remains with defensive earnings and structural growth (think megatrends).

Macquarie's TMT favourites currently are Telstra, IDP Education, Carsales ((CAR)) and NextDC ((NXT)).

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Post February, portfolio recommendations at Evans and Partners have seen a number of changes, mostly because inhouse strategists were anticipating better entry points lay ahead. That probably has proved the correct assumption, and a lot quicker than what was likely envisaged.

Disappeared from the recommended list: Woolworths ((WOW)), Treasury Wine, and Waypoint REIT ((WPR)).

Evans and Partners' base case forecast is for the domestic economy to narrowly avoid a recession, but the earnings environment will become (a lot) more challenging for Australian companies.

For Quality companies, investors are now guided towards: Brambles, CSL, Macquarie Group ((MQG)) and Rio Tinto.

Favourite Growth companies are: Carsales, NextDC, and Xero ((XRO)).

Most preferred Yield opportunities: APA Group, HomeCo Daily Needs REIT, Telstra, and Wesfarmers ((WES)).

Recommended tactical opportunities remain in Flight Centre ((FLT)), Qantas Airways ((QAN)), and Woodside Energy.

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Still interested in jumping on the gold bandwagon?

Canaccord Genuity's favourites among producers are Capricorn Metals ((CMM)), Northern Star ((NST)), Perseus Mining, and Resolute Mining ((RSG)). Among developers, the broker highlights Bellevue Gold ((BLG)), De Grey Mining ((DEG)), Orecorp ((ORR)), and Predictive Discovery ((PDI)).

Peers at UBS prefer Gold Road Resources ((GOR)), SSR Mining ((SSR)), and Northern Star ((NST)).

Analysts at Morgan Stanley have selected Evolution Mining ((EVN)) and Newcrest Mining; they remain cautious on Regis Resources ((RRL)) due to potential disappointment from DNO.

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From T Rowe Price's latest strategy update:

"The combination of a weak earning outlook and fair valuation support a neutral view. While a China rebound could soften the expected economic slowdown, the housing market and domestic consumption are poised to negative surprises in the coming months."

Three negative thoughts post February:

-Consumer spending is at risk of mortgages being reset throughout 2023
-Latest earning results highlight concerns on margins going forward
-The RBA is more hawkish than what the health of the economy may be able to handle

T Rowe Price is Overweight cash and Underweight both equities (Neutral in Australia) and bonds.

Post February Favourites & Duds

Analysts at Goldman Sachs are more positive on a number of ASX-listed companies than is market consensus post the February reporting season.

If Goldman Sachs is correct, each of those is offering opportunity for investors, in particular since share prices in general are in decline in March, inspired by general risk-off rather than company-specific triggers.

Stocks identified are:

-REA Group ((REA))
-Qantas Airways
-Lifestyle Communities ((LIC))
-ReadyTech Holdings ((RDY))
-Jumbo Interactive ((JIN))
-Universal Store Holdings
-Judo Capital Holdings ((JDO))
-James Hardie

Goldman Sachs is more negative than consensus on the outlook for:

-a2 Milk ((A2M))
-Bega Cheese ((BGA))

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Analysts at Morgan Stanley have equally started to highlight their favourites (with conviction!) post the February season. Morgan Stanley prefers the daily drip method, whereby one opportunity is highlighted each day.

Up until today five companies have been highlighted:

-Eclipx Group ((ECX))
-Tuas ((TUA))
-Propel Funeral Partners ((PFP))
-Data#3 ((DTL))
-Corporate Travel Management ((CTD))

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Worth mentioning: the two companies most severely hit and included in FNArena's Monitor for the February results season are upcoming software and hardware developer Atomos ((AMS)) and services provider to the wealth management industry, Bravura Solutions ((BVS)).

Atomos was forced to call in the administrators, having suffered larger-than-expected losses, while Bravura's beacon was saved through a highly dilutive capital raising. In both cases, the operational performance was much worse than market forecasts.

Regarding Bravura, Goldman Sachs ceased coverage post cap raising, while Jarden questions the realistic prospects for earnings recovery and has downgraded to Neutral from Buy while slashing its price target to 35c from a prior $1.01. EPS forecasts have been reduced by -100% and -70% respectively for FY23 and FY24.

All-Weathers: Post-February

The first observation to make is that Australia's Quality companies usually perform well during results seasons. This doesn't mean they cannot miss forecasts or suffer from share price weakness, as macro and general sentiment play a role as well, but overall, your typical Quality company is a great place to be when reported financials are measured against medium- to longer-term expectations.

The first company to highlight post-February financials is CSL with the interim report indicating the negative impact from covid and lockdowns on plasma collection is now truly in the past. Underlying, this company is yet again ready for solid, double-digit percentage growth in EPS, which is also reflected in today's consensus forecasts.

To some, the primary observation is that CSL shares have effectively trended sideways since 2020, but if I picture a conversation between Mr Market and CSL, it revolves around that old cliche: "it's not you, it's me". Investor focus in Australia has been all about covid-beneficiaries, bond yield victims, inflation protection and China leverage. None of these themes du jour include the largest healthcare company on the ASX.

This too shall pass, eventually. It might still take a while before enough investors feel confident about the acquisition of Vifor, but I still remember the scepsis surrounding the purchase of Novartis' global influenza vaccine business in 2014. It proved overly conservative and unnecessary. CSL has had Vifor on its wishlist for more than a decade. Already, analysts have been positively surprised, and excited, about the add-ons Vifor brings to the CSL future product pipeline.

This is not to say there are no risks. There's a small Dutch-based company, Argenx, that is on everyone's radar. And CSL management itself is not super-confident where exactly profit margins will be in 18 months' time, as higher operational costs might stick around for longer.

But if history is any guide, sceptics will again be left barking in the wind, while shareholders enjoy the rewards from their loyalty. As Warren Buffett tends to say: invest in companies, not in the share price. Longer term, share prices do follow underlying fundamentals.

We might as well stay with the Wilsons comparison… Indeed, Woolworths is more 'defensive' than 'growth', and its typically elevated valuation multiple became a big burden to bear last year. But make no mistake: Woolworths is the superior operator in its sector, similar to CommBank ((CBA)) among local banks, and this superiority will prove its value, one way or another, throughout the ups and downs ahead.

I have become a big fan of picking market leaders in sectors as I have come to appreciate their sustainable, long-duration competitive advantages vis-a-vis smaller competitors. Other obvious examples are REA Group versus Domain Holdings Australia ((DHG)), Sonic Healthcare versus Healius ((HLS)), and Aristocrat Leisure ((ALL)) versus Ainsworth Game Technology ((AGI)).

Woolworths runs the superior franchise in Australia and as a typically defensive, its valuation is probably high because of the multiple uncertainties out there. Then again, current consensus forecasts confirm the market leader's superiority versus Coles and Metcash ((MTS)).

Supermarkets and big box department stores have their challenges ahead, including pressure on household budgets and rising costs, but Australia is still an island and many of the products are non-discretionary. The possibility of a weaker share price later in the year will be very much dependent on what is going on elsewhere, including for the Australian economy generally.

One Quality market leader that is using post-covid uncertainties to strengthen its future growth platform is Carsales ((CAR)). Usually most attention goes towards REA Group, also because real estate remains a long-term no-brainer in Australia, and Seek ((SEK)), with the latter a prime example of the long term value of making strategic investments, but this time Carsales' strategy of buying out its partners in offshore portals is catching investors' attention.

First the US, then Brazil. Carsales is effectively broadening its growth and appeal beyond the Australian market in which it remains the undisputed number one. Expanding offshore is not a guarantee of success, even REA Group can attest to that statement, but Carsales knows the businesses it is buying. And locally it has discovered the advantages of exerting pricing power, as well as strengthening relationships when covid hit dealerships hard.

If there's one Quality, sustainably growing market leader that has seen value investors appearing on its register in recent years, it has been Carsales. Maybe this is because, on a simple comparison with REA Group and Seek, PE ratios of 28x and 25x don't look too bad for a platform operator that promises 10%-plus growth (pretty much) annually with a dividend yield of circa 3%?

One company that 100% doesn't receive enough attention in Australia is Ebos Group ((EBO)). This NZ-listed company joined the ASX in late 2013 and has proven a consistent and reliable performer since, which is also reflected in its share price over the period. Ebos Group might be the one ASX-name whose shares are trading at an all-time high while most investors locally might still respond with: huh, who?

Some might be familiar with chemist brands including Terry White Chemmart, Symbion and Pharmacy Choice+, but Ebos does a lot more, calling itself the largest and most diversified Australian marketer, wholesaler and distributor of healthcare, medical and pharmaceutical products. It shares with Woolworths the recognition of the potential of moving into animal care products.

Ebos wasn't always included in my selections, but it had been on my radar for multiple years, until I decided to add it as a Potential All-Weather Performer.

The February results season offered plenty of misses and disappointments, but from the perspective of All-Weathers, the biggest disappointment was delivered by Domino's Pizza ((DMP)). I could read between the lines of multiple research reports post the interim result that analysts had been quite shocked by how dreadful things had become operationally in such a short time.

Will this be the (negative) turning point in what has been an extremely volatile, but also exceptionally successful international trajectory for this company over the past decade?

I dare not to make any firm statement at this point, other than that history has taught me it's usually best to remain prudent, and not on the register, of companies whose fortunes turn in such a quick and decisive manner. Others that have preceded Domino's in past seasons, think a2 Milk ((A2M)), Appen ((APX)) and Blackmores ((BKL)), are hardly encouraging examples to look back upon.

Other companies on my curated selections that caught my attention in February include Audinate Group ((AD8)), Endeavour Group, Goodman Group ((GMG)), NextDC ((NXT)), ResMed, Seek, Steadfast Group ((SDF)), Wesfarmers ((WES)), and WiseTech Global ((WTC)).

With exception of NextDC, all those companies have been registered in FNArena's Monitor as a 'beat'.

I remain confident Pro Medicus ((PME)) is one of the highest Quality growth companies on the ASX. Getting on board is simply a case of picking one's entry level, while ignoring the multiples and the dogs on the sideline barking in the wind.

A special mentioning goes out to HomeCo Daily Needs REIT ((HDN)) which, as a REIT, doesn't fit the mould to be included in my selection of Dividend Champions, but its interim result left little to criticise and the All-Weather Model Portfolio owns it as part of its allocation to dividend/income stocks, alongside Telstra and a dedicated ETF.

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