Rudi’s View: February’s Reality Check

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The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

February’s Reality Check

By Rudi Filapek-Vandyck, Editor

No matter how one tries to cut and slice the facts, February has been a sore disappointment for Australian investors, starting with price action as the ASX200 retreated by -4.22% over the month but kept losses limited to -3.79% through bank and other dividends.

February marked a notable reversal from the optimism that saw January starting off with strong gains, pushing the index up by 4.6%, but all of those gains, and widespread optimism, have now disappeared.

Given the negative trend that dominated the final week of the month, investors might consider it a positive to see the major index unchanged for the year to date.

Excitement Arrived Too Early

February also marks the interim results season for most ASX-listed companies and here too a firm reality check has descended upon the market.

Pre-season there was widespread optimism that earnings might have bottomed and companies would be whetting investors’ appetite with better cost control and rising sales, and early signs of greenshoots appearing on top.

Alas, such forecasts and anticipations have been proven to be largely premature, with businesses continuing to struggle with exposures to New Zealand across the Tasman, and Victoria on the mainland, in addition to uphill battles in places like the US and the UK.

At face value, February did generate more earnings ‘beats’ than ‘misses’, but the gap between these two outcomes notably reversed throughout the final stretch of the season as more smaller cap companies reported.

Analysts at Morgan Stanley observed when measured against sales and revenues, the balance actually swings in favour of more ‘misses’, which yet again indicates times remain tough out there for most companies.

Which is also the key reason as to why boards and management teams preferred to communicate with caution.

Strategists at Macquarie had anticipated much more talk about greenshoots and better times arriving, but it simply wasn’t to be.

UBS research shows more companies have seen forecasts being downgraded than upgraded in February.

Results Are Better, But Not Great

The FNArena Results Season Monitor for the month doesn’t simply look at reported earnings, but also takes into account broader items and forward-looking guidance, and its balance shows beats/meets/misses at roughly one third each for ASX200 companies.

While this does mark a significant improvement on last year’s August season when disappointments made up the largest percentage, it was not better than February twelve months ago which was not a particularly ebulliant experience either.

Now all companies have reported for the season, consensus EPS growth has declined to -0.7% for FY25, implying negative growth on average for the third consecutive year for Australia.

The good news is EPS growth for FY26 currently stands at 8%. For a market that needs something positive to look forward to, significantly above-average growth on the horizon is exactly what the doctor would prescribe.

Sectors mostly responsible for the reduction in profit forecasts are Energy, Banks, Healthcare and Tech sectors.

The offset is many, including RBA decision makers themselves, question the bond market’s optimism on the number of rate cuts forthcoming.

There’s still plenty of uncertainty about the exact impact from the new US administration’s policies, not the least since that spectacular blow up in negotiations with the Ukraine.

If February is our guide for what follows next, it very much looks like US economic momentum is increasingly under a question mark. It’s eerily quiet on private equity deal makings. Don’t count on investor anxiety to disappear anytime soon.

Greenshoots & Portfolio Rotation

It wasn’t all bad news that happened throughout February, of course. When viewed through more pink-coloured glasses, it can be argued many sectors in Australia are exhibiting resilience in the face of multiple headwinds and much of the negatives I just highlighted are the result of resources companies feeling the pressure (yet again).

But one of the key characteristics of February has been that positive surprises did not automatically receive a reward, as is usually the case.

Plenty of examples around to support that observation. Think JB Hi-Fi ((JBH)) and Hub24 ((HUB)), but also ResMed ((RMD)), Wesfarmers ((WES)) and Pinnacle Investment Management ((PNI)), and others.

In contrast, consensus-beating results by the likes of a2 Milk ((A2M)), Audinate Group ((AD8)), oOh!media ((OML)), Bapcor ((BAP)) and BlueScope Steel ((BSL)) have seen their share prices rally hard in response.

One possible interpretation is that some prices had already run too hard, irrespective of results still beating forecasts.

Another explanation seems equally valid: investors’ focus remains on the upcoming cyclical upturn, hence cyclical laggards on a relatively cheap valuation remain the flavour du jour, hopefully while avoiding too many disasters along the way.

Landmines Galore

With respect to the latter group of companies, every results season generates a list of sorry disappointments and savage sell-offs, but February in particular seemed ultra-treacherous for the unsuspecting investor.

An observation confirmed by UBS strategist Richard Schellbach whose number crunching puts the average intra-day swing in share prices at 7% on days of result reporting.

Such volatility is “unprecedented”, reports Schellbach, but also likely to stay with the market so investors will simply have to find ways to deal with it.

As to why the average share price response has become much heavier these days, the UBS strategist suggests more passive money (think broad-based ETFs), reduced liquidity, and stale earnings estimates are probably all part of the explanation.

Regarding the latter, it is a fact most brokerages operate on smaller teams of analysts these days and less time and opportunity no doubt translates into less attention and fewer updates for less important (less popular) companies. Hence, increased odds for significantly different results, in either direction.

February’s list of eye-catching punishments includes the likes of AMP ((AMP)), Mineral Resources ((MIN)), Bendigo and Adelaide Bank ((BEN)), SiteMinder ((SDR)), Integral Diagnostics ((IDX)), Viva Energy ((VEA)), Domino’s Pizza ((DMP)), Platinum Asset Management ((PTM)), and Magellan Financial ((MFG)).

Here one observation is worth highlighting in reference to the legendary Warren Buffett’s observation that many a turnaround story never genuinely turns around.

What do companies such as Aurizon Holdings ((AZJ)), Lendlease ((LLC)), IDP Education ((IEL)), Platinum Asset Management and Domino’s Pizza have in common?

These are all businesses operating in struggle street for multiple years on end, and February did –yet again– not deliver that long-awaited positive reversal in fortune that many a loyal shareholder is holding out for. We can also add the healthcare sector generally to that list as well.

One firm conclusion from February is investors better be extremely picky when positioning for businesses to emerge from troubled waters.

Lest we forget: those buying and holding on to Star Entertainment Group ((SGR)) shares might see the value of their allocation reduce to zero as administrators are waiting to be called in while trading is suspended because no financial result has been forthcoming.

Another observation worth highlighting is when times are tough and tricky, smaller cap companies do represent significantly more risk to the downside.

In February, all five heaviest decliners inside the ASX300 weakened in excess of -30%. Shares in Appen ((APX)), which nowadays is only inside the All-Ords and the local Technology index, dropped more than -50% for the month.

On the flipside, owning shares in Nanosonics ((NAN)), Megaport ((MP1)) or Arafura Rare Earths ((ARU)) would have delivered 30%-plus in net gains.

Revenues & Dividends

Morgan Stanley has spotted a close relationship between positive surprises at the top line level (sales and revenues rather than simply margins or profits) and strong share price rewards post result releases.

Also, some 22% of companies reporting have triggered meaningful positive revisions to analysts’ forecasts and these share prices too have been handsomely rewarded.

Companies that fall into this category include Telix Pharmaceuticals ((TLX)), Ramelius Resources ((RMS)), Nanosonics ((NAN)), Temple & Webster ((TPW)) and HMC Capital ((HMC)) for FY25 forecasts.

For the following year of FY26, this also includes Coronado Global Resources ((CRN)), MAC Copper ((MAC)), Paladin Resources ((PDN)), SiteMinder, and Service Stream ((SSM)).

Morgan Stanley’s number crunching also shows for the second season in a row revenues generated more misses than positive surprises with the final balance a net negative outcome. 

This has no precedent over the past decade and surely puts the debate about the true state of the Australian economy and whether RBA rate cuts are justified to rest.

Total dividend announcements have equally been recorded as a net negative for the season.

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See also:

https://fnarena.com/index.php/2025/02/17/rudi-interviewed-turning-laggards-into-winners/

https://fnarena.com/index.php/2025/02/20/rudis-view-best-ideas-conviction-calls/

The FNArena Results Season Monitor: https://fnarena.com/index.php/reporting_season/

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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).

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(This story was written on Tuesday, 4th March, 2025. 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.

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