Rudi's View | Feb 14 2024
In this week's Weekly Insights:
-February 2024 Is A Blue Sky Affair
-Conviction Calls
-February Results - Stocks To Watch
By Rudi Filapek-Vandyck
February 2024 Is A Blue Sky Affair
Investor sentiment in early 2024 is probably best described as: good news is still good, of course, but bad news can be good too, as long as it is not too negative.
Investors in the local share market are once again reminded how powerful a driver general sentiment can be.
At face value, the ASX200 might only be up slightly year-to-date (up 0.7%), which seems rather disappointing when compared against the raging bull market that seems to be dominating indices in the USA, but underneath, at the individual stock level, the local February results season is basking in a generally supportive environment.
Early signs are companies are meeting or beating market expectations and, equally noteworthy, investors seem prepared to overlook short-term niggles and imperfections, instead focusing on better prospects ahead, and on getting on board once the results release is out of the way.
Results seasons in Australia have increasingly become a second-half (of the month) phenomenon and so the first twelve days of February only offer a brief snippet of what the rest of the season might have in store. But there's no room for debate the early signals look extremely supportive of an overall pro-risk taking environment.
Up until Friday, the FNArena Corporate Results Monitor had assessed 21 market updates and no fewer than 11 have beaten market forecasts with a further nine reporting in line. The one "miss" came from REA Group ((REA)) which on broad-based appreciation still released a "solid" performance, carried by "robust" growth and ongoing prospects of continued strong growth momentum ahead.
Most analysts covering the sector acknowledged operational momentum had actually surprised to the upside. The one blemish was management at Australia's number one property portal flagging there will be higher costs in the year ahead as the company spends more to solidify its future growth path.
Two things to keep in mind: share prices respond to how results compare to expectations, which is not necessarily a great indicator for what the future of a company looks like. Spending more means lower growth in profits which is often, though not always, taken as a negative by short-term minded traders.
As it happens, REA Group shares sold off on day one, rallied on the following day, and then retreated slightly on Monday for an overall relatively flat trajectory that has dominated the shares thus far in 2024. It is worth noting REA shares have almost doubled in price since mid-2022 and rallied circa 29% since late October.
Trading on forward-looking PE ratios of respectively 54x and 45x for this year and next, the average target price of $172.74 sits below today's share price. But as a high-multiple, market-leading quality growth company on the ASX, REA Group shares should benefit from RBA rate cuts and lower bond yields later in the year.
As such, REA Group shares might well be the poster child of current market sentiment, and indicative of what to expect, generally, from the coming three more weeks.
Share prices for all of AGL Energy ((AGL)), Audinate Group ((AD8)), Boral ((BLD)), Cettire ((CTT)), Champion Iron ((CIA)), Nick Scali ((NCK)), News Corp ((NWS)) and ResMed ((RMD)) -all having reported better-than-expected performances- went up as investors are keen to reward positive news.
Share prices might still go up even if market updates are not quite universally positive, or suffer a minor retreat only, which could have triggered a different outcome under less-rosy circumstances. Think Amcor ((AMC)) and Charter Hall Long WALE ((CLW)).
Underneath day to day share price moves, the ASX200 is pricing in 16x the average EPS forecast for the twelve months ahead, which is above the historical average of circa 14.5x, as also shown by the fact the average forward-looking dividend yield is now below 4% against a long-term average of circa 4.5%.
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