What to Look for in the Thrills and Spills of ASX Earning Season

Deep breath in…

And exhale.

Forget trade tensions.

Push interest rate noise out of your mind.

Aussie investors are gearing up for the next big thing. Although it’s made to seem bigger than it really is.

Earnings season has hit the ASX again.

You can be sure there’ll be the same thrills and spills like last time.

Some stocks will beat, meaning they report sales and profit numbers above expectations. Others will miss.

You’ll see stocks jump and dip on the tiniest changes.

Just remember, it’s all a show.

Most of the activity you’ll see in the weeks ahead will only worsen performance. But that’s not the point.

The fundies buying and selling to optimise their portfolio will go back to clients and say, ‘See! We hold nothing but growing repeatable names.’

And they’ll survive for another year.

Free report: Aussie stock picker, Sam Volkering (with gains as high as 1,431% in the last 18 months) reveals what he believes are his next four big potential winners.

It’s us versus them!

Let’s do a quick recap.

What have we seen from some of the market movers?

Well, we had Telstra Corporation Ltd [ASX:TLS] drop almost 3% after profits fell 27%.

Now I can breathe a sigh of relief too. Months earlier I had told a friend of mine to get rid of his Telstra shares.

Telstra boss, Andy Penn tried to put his best spin on the sour results.

While today’s financial results show parts of our business continue to face short-term challenges, there are positive signs particularly with the significant increase in retail postpaid mobile services,’ Penn said.

Importantly, we remain very positive about Telstra’s prospects for the future. Demand for telco products and services continues to grow and telecommunications infrastructure is only going to increase in importance over the next decade.

Then there was AMP Ltd [ASX:AMP] with even more upsetting news for shareholders.

Profits were expected to come down all the way to $30 million. That was from profits of $848 million. But the wealth manager couldn’t even manage that.

Costs from the Banking Royal Commission pushed profits down another $2 million from expectations.

Another big financial institution that missed the mark was Suncorp Group Ltd [ASX:SUN]. The big bank had problems all round.

Investments didn’t pan out. Their insurance business paid out more claims than usual. Profits fell more than 44%. The stock fell more than 4% yesterday.

OK, that’s enough of the boring details.

Why am I even bringing this up?

Well, stocks like Telstra, AMP and Suncorp, they’re all prime targets for million- and billion-dollar funds.

What’s alarming is that retail investors (investors like you) also think these stocks are prime targets for investment.

Yesterday I showed you a list. Here it is again:

1. Afterpay Touch Group
2. Coles Group
3. CSL
4. The a2 Milk Company
5. Maca
6. National Australia Bank
7. Wesfarmers
8. Telstra Corporation
9. BHP Group
10. Citadel Group

This list is the top 10 stocks retail investors bought and sold last year.

That means Sunday investors, those who have a whole other job and invest as a hobby, compete against experts.

Now, I wouldn’t call all investment funds and the analysts within them experts. Not all retail investors are hobbyists either.

But who do you think knows more about an investment?

Someone who looks at price-to-earnings ratios and earnings growth?

Or the team of analysts that specialise in certain sectors, have been reading the last 10 annual reports and those of competitors? That have been talking to industry experts, looking at asset values and kicking the tyres at management HQ?

It’s why I think there’s a very strong case for retail investors to look in places where funds aren’t. And those places tend to be at the smaller end of the market.

Fishing where the big fish aren’t

Speaking of which, we also saw a few small-caps throw out some figures.

$200 million retailer City Chic Collective Ltd [ASX:CCX] did so well they threw a bone to shareholders. The Australian Financial Review (AFR) reports:

Formerly known as Specialty Fashion Group, the plus-size fashion retailer changed its name last November after selling its loss-making Millers, Crossroads, Katies, Autograph and Rivers chains to rival Noni B for $31 million.

As a result, the company is cashed up, with net cash of $35.5 million at the end of December compared with $16.1 million at the end of fiscal 2018.

Sales rose seven per cent to $75.4 million, with same-store sales up 9.6 per cent even though the chain was cycling strong 10.3 per cent comparable store sales growth in the year-ago period. City Chic opened five new stand-alone stores in Australia but closed eight Myer concessions.

$500 million radio network HT&E Ltd [ASX:HT1] also had some good news for shareholders yesterday. Again, from the AFR:

HT&E chief executive Ciaran Davis has flagged the radio broadcaster is looking to make deals in the radio and audio market, taking advantage of its beefed-up balance sheet following the $570 million sale of Adshel to oOh!media.

HT&E reported a full-year profit of $36.7 million on Wednesday, up 23 per cent from the prior year, excluding one-offs and discontinued operations such as Adshel, the sale of which was completed in September.

Earnings before interest, tax, depreciation and amortisation were up 7 per cent to $71.8 million, while revenue lifted 5 per cent to $271.8 million.

HT&E was a stock I suggested readers look at towards the start of this year.

But it wasn’t the only stock the heads here at Money Morning came up with. There are two more. You can have a closer look at all three stocks, here. (Note: these are not recommendations, just stocks that we think are interesting for you to look at and research in your own time.)

Again, why single these stocks out?

It’s not just because they’re small.

Both companies have qualities you should look for in any investment. They’re both trying to dominate a local economy.

For City Chic, that economy is apparel for the plus-size women of Australia.

For HT&E it’s local businesses wanting to get the word out to radio listeners.

The more these businesses expand within these smaller markets, the harder it is for new competitors to come in and take market share.

If either can eventually dominate their local economy, then all investors have to do is sit back and enjoy the ride.

Better yet, the fundies aren’t going to pick your pockets of such opportunities. The volumes on these small stocks will likely keep all these ‘big fish’ out of the pond.

That could you with a trove of opportunities. All you’ve got to do is cast your line and wait for something interesting to bite.

Your friend,

Harje Ronngard,
Editor, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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