Rudi’s View: Pre-February Top Picks & Favourites

Rudi's View | 4:59 PM

Updates on Conviction Calls, Best Buys and most favoured sector picks ahead of the February results season.

By Rudi Filapek-Vandyck, Editor

In less than two weeks --can you believe it?-- the February results season will be upon us.

Initial signals are patchy, though not necessarily representative.

Gold producer Northern Star ((NST)) started the year with a disappointing market update and the same observation can be made for Super Retail ((SUL)), Endeavour Group ((EDV)) and --earlier today--Amaero ((3DA)).

I am less familiar with smaller cap stories behind Biome Australia ((BIO)), Carma ((CMA)), TMK Energy ((TMK)), and Metro Mining ((MMI)), but in all cases the share price reaction has been negative. Biome's share price has since recovered (almost).

Have thus far seen their share price respond positively post market update: Codan ((CDA)), Nexsen ((NXN)), Ryman Healthcare ((RYM)), and Kingsgate Consolidated ((KCN)).

Decidre AI Industries Ltd ((DAI)) --market cap $174m-- issued an update on January 8 which initially saw its share price rally in response, but none of that proved sustainable and --no surprise to those owning technology and/or AI-related equities-- selling orders came thick and fast next.

Decidre shares are now noticeable weaker than previously. In Australia, growth and technology remain out-of-favour, no matter the market update (or so it still appears).

According to the ASX website: "Decidr AI Industries enables businesses to use Generative and Agentic Artificial Intelligence, unlocking new levels of productivity, automation, and personalized customer engagement."

I might be reading too much into these early signs, but my inclination is to expect a continuation of the trend that started during results season in February last year: above average volatility with higher spikes and falls, and in much higher numbers.

It might be an apposite strategy to hold cash in advance. There might be opportunities galore with eyes firmly on the longer-term horizon.

Corporate USA - Trends

Apart from a handful of early reporters, such as Alcoa ((AAI)), Credit Corp ((CCP)) and ResMed ((RMD)), it'll still be a good month before corporate Australia unleashes its financial performances into the public arena.

Before then, there's plenty to pay attention to, and to possibly take guidance from, during the quarterly reporting season in the USA. Early signals over there are equally rather patchy.

An at face value better-than-expected quarterly performance by JP Morgan resulted in a weaker share price and the likes of Bank of America, Citi and Wells Fargo have equally found the bar for further share price upside has been lifted.

Once again, with indices at or near all-time record highs, and after three years of double digit percentage returns, corporate results are being touted as at an important inflection point. After all, those "expensive" looking share prices need to be confirmed and verified.

Or so the narrative goes.

I am sure investors get a bit tired of hearing the same warnings over and over again. Which is not to say a bad reporting season couldn't possibly put a dent in the hereto irresistible market enthusiasm and optimism.

In the lead-in, risk appetite remains high and analysts have been lifting their forecasts in direct contravention to the usual seasonal pattern. As analysts at Blackrock put it: solid economic growth combined with Fed rate cuts have boosted earnings and profit margins.

Now add the prospect of AI-driven efficiencies and (expectations of) active stimulus from the Trump administration and there should be no secrets as to where all this optimism stems from. But that's only half of the story, at best.

One of the ruling narratives is that cyclicals and small caps will outperform Megacaps and yesteryear's AI Champions and that thesis will surely be put under the microscope over the coming weeks.

In Australia the one sector that has noticeably enjoyed an uptick in earnings forecasts --well above the rest of the market-- is Materials.

For good measure: the Magnificent7 are still projected to grow strongly. It's the gap with the remaining 493 that make up the S&P500 that is expected to narrow significantly.

Watch this space. This might be one reporting season that lives up to the hype of being "very, very important".

Plenty of US strategists and investment advisors continue to support the Megacaps and AI Champions, though none of that is mirrorred in Australia. Here one of the big questions remains: when will the bear market for Quality, Technology and Growth stocks end?

Not sure whether February might/can produce enough answers to that question. Maybe fear for imminent RBA tightening needs to dial down? Maybe the Nasdaq needs to have a sizeable wobble first?

So far, and no matter the narrative or personal perspective, one observation stands as a rock in Australia: selling orders still dominate share prices for Pro Medicus ((PME)), TechnologyOne ((TNE)), WiseTech Global ((WTC)), Xero ((XRO)), and the likes.

That's extraordinary given most share prices started weakening in July last year. Bear markets are, indeed, truly brutal.

Just ask any investor who held shares in Pilbara Minerals ((PLS)) in 2024 or Woodside Energy ((WDS)) shares since 2023.