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Market consensus vital to stock performance

SMSF trustees who wish to invest in shares must be aware of the market consensus and predicted levels of profit for the companies whose stock they are interested in buying, according to an equities strategist.

Bell Direct’s Julia Lee said company reporting season is important for investors as it provides an indication of how companies will perform months down the line.

“Companies that beat what the market expects, beat the consensus in terms of earnings during reporting season not only tend to outperform three weeks after they’ve released their reports, but even five months down the track,” Lee told the recent Australian Securities Exchange Investor Day in Sydney.

“Companies that also have a strong price response where their share price performance has also beaten the market, that’s an even stronger effect.”

She warned robust performance trends, strong revenue and profits do not guarantee a share price increase.

“If a company came up with record profit, 100 per cent revenue growth and 100 per cent profit growth, but the market had been expecting to see 200 per cent revenue growth and 200 per cent profit growth, and that company said it’s grown its revenue and profit by 100 per cent, how do you think the value of that business will adjust to that new information?” she said.

“Will the share price adjust up or adjust down? It will adjust down because the market prices in new information. So it’s very important to know what the market consensus is or what the market thinks the profit is going to be because it’s all about beating a number or underperforming against that number.”

The best-performing stock can remain stagnant while the worst stocks can be best performers based on new information that is incorporated into the share price, she added.

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