Lessons we can profit from
A corporate health check can help investment decisions
WITH the latest profit reporting season just concluded for Australia’s listed companies it’s a good time to examine the health of corporate Australia, identify any trends and learn some new lessons on equity investing.
It’s also a good time to assess the status of stocks in your current investment portfolio to determine whether you want to stay in them or get out. Remember the end of the financial year is fast approaching and that window of whether to rebalance for a better tax outcome opens.
The strong message from this profit reporting season is that corporate Australia is in good, but not spectacular, health.
Importantly, based on the profits reported, the Australian share market is not overvalued on a price- to- earnings basis. In fact the PE ratio of the overall market is right on its historic long- term average.
From the results, a lot of new and existing investment themes can help us make future investment decisions.
INVESTORS WILL CANE ANY COMPANY WHICH DISAPPOINTS
With the rule of continuous disclosure of information to the market, investors have never been better informed about the state of their share investments between official profit reporting seasons. Companies must immediately inform the market if there is any significant change to their business fortunes.
As a result, share analysts can be pretty comfortable in making their assessments about stocks they follow.
So if a stock doesn’t deliver on expectations, their share price is absolutely smashed by disappointed investors ... and they will likely get a “please explain” from the Australian Stock Exchange and maybe ASIC as well.
Dominos was just one of a number of companies which felt the backlash of a disappointing result. It’s a harsh lesson that investors expect transparency.
UNDERSTAND INVESTMENT CYCLES AND THE RIPPLE EFFECT OF ECONOMIC TRENDS
It was only a couple of years ago that share prices of our major resource companies were being pounded by the end of the mining investment boom. In this latest reporting season they were the market darlings.
Led by Rio and BHP, bigger than expected profits and dividend payouts led to a significant share price boost.
Why? Well the end of the investment boom naturally led into a production boom which coincided with an improvement in the global economy and rise in commodity prices. They became money- making machines.
They are a good example of using current economic figures as a lead indicator of future share market performance.
We’ve known the US and European economies have been improving for a while now, and China has been solid, so it’s only to be expected commodity prices would rise and resource stocks would benefit.
Same thing with the housing and construction sectors. Record home building and massive infrastructure projects have fed into the companies involved in those sectors which are, in turn, delivering healthy profits. Bluescope Steel and Coates Hire ( part of Seven Group) have been classic examples of that.
WELL RUN ‘ DISRUPTERS’ ARE IMPACTING TRADITIONAL BUSINESS MODELS – AND WINNING
This reporting season has also been reflecting how tough it is for companies with outdated business models and which aren’t prepared to innovate.
Nowhere is this starker than retail. The department store model by itself is broken while specialty and online retail is thriving. Just look at the difference in fortunes of department store chain Myer and online retailer Kogan.
Myer is suffering from expensive store leases and dwindling profit margins from constantly being “on sale” while Kogan is thriving from better prices, lower costs and great customer service.
Making sure your stocks continue to innovate and pivot seems to now be a key ingredient of success.
CRACKING CHINA
It can be a roller- coaster ride and need a significant investment, but cracking the China market can be massive.
The new frontier for Australian companies is catering for the demands of the burgeoning wealthy Chinese middle class consumer.
A2 Milk and Bellamy’s are two, of many, cases in point. Both reaping the benefits with significant profit rises. But it hasn’t been all smooth sailing.
A year or so ago the Chinese government proposed changes to the licensing of many consumer imports and both stock prices dropped sharply.
Eventually those changes weren’t as harsh as first mooted and the share price, and profits, have rebounded nicely.