Reporting season, when listed companies release their latest results, can be a useful guide as to which locally listed shares to invest in, a prominent equities analyst has said.
Speaking at the recent Australian Securities Exchange Investor Day in Sydney, Bell Direct equities analyst Julia Lee said reporting season can be an important way to gain an insight into how the various market sectors are performing and are likely to perform in the immediate future.
“Looking at the August full year reporting season from last year, of the stocks that were down on the day of their full year earnings report 84 per cent were still lower six weeks later. That’s a pretty big statistic. Seventy-three per cent of these were lower five months later,” she explained.
“Of the stocks that had a positive performance on reporting day 71 per cent were trading higher six weeks later and 51 per cent were trading higher five months afterwards.”
According to Lee, certain conclusions can be drawn from these trends.
“This tells you that people are more negative towards stocks that underperform and that effect lasts longer. For example, stocks down on the day of the report were, five months later, trading lower,” she said.
“It also tells you the impact of reporting season is not just for that month but continues for a number of months afterwards and it really gives us an insight into which of those companies have that positive earnings momentum because things tend to move in cycles and if you can get that positive momentum coming through it usually continues to flow through.”
Lee noted some investors may look at companies with poor reporting season results as potentially being undervalued with their stocks being good contenders to experience a price appreciation in the near future but she warned this sentiment may be dangerous.
“Some of these companies are relatively cheap, and some of them do bounce back, but the vast majority, I’d say about eight out of 10, continue to experience fresh new lows,” she said.
“So you have to be very careful when you’re entering into companies because you think they look very cheap. Often they go on to be cheaper and cheaper. We call them fallen angels.”''