Rudi’s View: August Trends Have Darkened

This story features MEGAPORT LIMITED, and other companies. For more info SHARE ANALYSIS: MP1

By Rudi Filapek-Vandyck, Editor

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JP Morgan has nominated Brambles ((BXB)), Challenger ((CGF)) and WiseTech as stand-out positive performances. On the negative side, the broker has placed Aurizon Holdings ((AZJ)), Seek ((SEK)) and Megaport.

At Macquarie, analysts put Breville Group ((BRG)) and Cleanaway Waste Management ((CWY)) among the growth companies that are standing out this month, and make the segment look good overall. Key positive surprises, suggest Macquarie, have come from Charter Hall ((CHC)),  Brambles and WiseTech.

For big disappointments, Macquarie points at BlueScope Steel, Megaport, and a2 Milk Co ((A2M)).

Analysts at Ord Minnett make two observations:

-freight costs have been more of a problem for exports into the UK and Europe, less for imports into Australia, and most companies are able to manage it
-the consumer is weak, but some retailers are able to execute well, with weakness also prevalent for car dealers, quick service restaurants and gaming

JP Morgan has identified the following three key themes:

1. Labour markets are noticeably easing
2. Housing remains a key challenge
3. Inflation is moderating

Over in the USA, where the quarterly reporting season is nearing its end, with the all-important Nvidia yet to report later this week, analysts at Morgan Stanley draw the following three key conclusions:

-Consumer weakness is becoming a theme. Not as a fall-off-the-cliff threat, but spending is weakening nevertheless
-Travel has begun to falter, though signals across industries are varied and mixed
-Consumers remain prepared to pay a premium for products and services that offer a greater degree of convenience

Probably the most important observation is the number of US companies for which analysts are turning more positive is shrinking yet again. In other words: yes, growth forecasts in the US are still trending upwards, but the number of companies with positive momentum is getting smaller this Q2 reporting season.

It’s good to keep in mind while the local reporting season will end by the end of this week, the Monitor still only comprises of 189 results. A whole lot more is yet to be unleashed in the coming days.

FNArena is updating on a daily basis: https://fnarena.com/index.php/reporting_season/

Among the changes in stock preferences that have occurred is Wilsons including James Hardie ((JHX)) in its Focus Portfolio (in explicit preparation of Fed rate cuts that should stimulate building and renovating in the USA).

Netwealth Group ((NWL)) has been removed after a stellar share price performance that has Wilsons suggesting there’s limited potential for further upside, in the short-to-medium term that is.

Wilsons equally reconfirmed its positive view on CSL ((CSL)) has remained intact, despite Vifor yet again disappointing in CSL’s FY24 release, as well as its ongoing negative view on CommBank ((CBA)). Nobody denies the banks are performing well, relatively, and CommBank is the supremo in the local sector, but those valuations…

An observation from Macquarie: Banks in Australia are trading at circa 3 standard deviations away from their average valuation since 2001, making them the most expensive sector on the ASX.

Morgan Stanley’s Australia Leading Ideas Equity Portfolio has now included Audinate Group ((AD8)) shares in support of this broker’s view this month’s disappointment (through a subdued FY25 outlook) is simply a short-term set-back. Nothing more, nothing less.

These dedicated portfolios tend to outperform the local index over time (based on calculations published by these brokers) and for this reason I thought it might be worthwhile to provide an insight into what’s currently included.

Communication Services
-Telstra ((TLS))
-Car Group ((CAR))

Consumer Discretionary
-Wesfarmers ((WES))
-Domino’s Pizza ((DMP))

Consumer Staples
-Treasury Wine Estates ((TWE))

Energy
-Paladin Energy ((PDN))
-Santos ((STO))

Financials
-CommBank
-National Australia Bank ((NAB))
-Westpac ((WBC))
-ANZ Bank ((ANZ))
-Macquarie Group ((MQG))
-Suncorp Group ((SUN))
-QBE Insurance ((QBE))

Healthcare
-CSL ((CSL))
-ResMed ((RMD))

Materials
-BHP Group ((BHP))
-Rio Tinto ((RIO))
-Orica ((ORI))
-James Hardie ((JHX))
-South32 ((S32))

Real Estate
-Goodman Group ((GMG))
-Scentre Group ((SCG))

Utilities
-AGL Energy ((AGL))
-Origin Energy ((ORG))

Small Caps (ex-100)
-Deterra Royalties ((DRR))
-Corporate Travel Management ((CTD))
-Hansen Technologies ((HSN))
-Premier Investments ((PMV))
-Propel Funeral Partners ((PFP))
-Life360 ((360))
-Audinate Group ((AD8))

In comparison with the prior 11x August results seasons that have been covered by the FNArena Monitor, some 30% of companies outperforming forecasts is by no means a bad result, that’s pretty much in line with the decade-long average, but 37.6% in disappointments -if sustained- would be by far the worst outcome since 2013.

What makes the current trend so worrisome is that history suggests the tail end of reporting seasons in Australia brings out more misses and bad news performances. And with share prices on average holding up or rising further, JP Morgan highlights the ASX is currently leading the world in terms of multiples expansion (earnings estimates are falling).

The only sector locally that has seen its multiples contract is the Energy sector.

It would not surprise that if the US market stumbles at some point, the Australian share market might underperform during the process. It’s not simply due to the difference in central bank pivots, surely?

FNArena keeps a weekly tab on changes in estimates, targets and ratings: https://fnarena.com/index.php/2024/08/26/weekly-ratings-targets-forecast-changes-23-08-24/

Paying subscribers have 24/7 access to a dedicated page to my research into All-Weather Performers: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

More reading:

https://fnarena.com/index.php/2024/08/21/rudis-view-august-paints-a-bifurcated-picture/

https://fnarena.com/index.php/2024/08/14/rudis-view-august-results-early-beginnings/

https://fnarena.com/index.php/2024/08/07/rudis-view-august-results-polarisation-divergence/

https://fnarena.com/index.php/2024/07/31/rudis-view-what-can-august-deliver/

All-Weather Portfolio FY24 Review

The FY24 review for the All-Weather Model Portfolio can be downloaded here:
https://www.fnarena.com/index.php/download-article/?n=DE2A4552-E2C7-4DC7-0A896CE5CF68ACD8

Prior years:

FY23: https://www.fnarena.com/index.php/download-article/?n=DFC11150-CB36-C777-1AA3EDA640E2F5BF

FY22: https://www.fnarena.com/index.php/download-article/?n=DFE7241B-9CD8-61F1-1602C581A8E539C4

FY21: https://www.fnarena.com/index.php/download-article/?n=DFF82691-E53E-3CF5-17A2337D72CDB54F

Video: Why FNArena & All-Weather Stocks

I’ve used my participation to the recent InvestmentMarkets conference to explain how/why FNArena started & what investors get out of it, including research in All-Weathers and Gen.Ai

The video: https://bit.ly/3A1pLuz

FNArena Talks

-Pre-results season interview with Ally Selby at LiveWire Markets: https://www.livewiremarkets.com/wires/rudi-why-csl-could-be-headed-for-500

-Danielle Ecuyer talks with The Australian’s James Kirby on The Money Puzzle podcast:
https://podcasts.apple.com/au/podcast/if-the-market-has-recovered-shouldnt-you-be-bargain-hunting/id1201031401?i=1000664692977

FNARENA VIDEO

Dani and I have put together a video to explain our focus (and enthusiasm as investors) for GenAi, the fourth industrial revolution:

https://fnarena.com/index.php/fnarena-talks/2024/07/15/investing-in-genai-the-fourth-industrial-revolution/

SPECIAL REPORT

Last month, FNArena published a 78 pages Special Report on GenAi, the fourth industrial revolution with lots of in-depth insights, forward projections, and useful links to companies for investors in the Australian stock exchange.

This Special Report remains exclusive for paying subscribers. Download your copy via the Special Reports section on the website.

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 26th August, 2024. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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