How to Navigate a Choppy Earnings Season — Stock Market Trends
In today’s Money Morning…an unforgettable year, for a lot of the wrong reasons…sorting the trash from the treasure…finding the right trends…and more…
It’s that time of year again…
The time for all the CFOs to prove their worth: earnings season.
Yes, as we head deeper into July, as well as August and September, expect a flood of annual reports. The best and most up-to-date information you’ll get on a company all year.
A detailed and comprehensive look at a company’s balance sheet and cash flow statement — as well as plenty of added commentary or context that can be hit or miss in terms of its relevancy.
But, for investors who like to familiarise themselves with the companies they invest in, these reports are invaluable. Giving you the best opportunity to really grasp what is and isn’t going on in the boardroom.
For better or worse.
Which is why when earnings season rolls around, it pays to stay informed. Because you can expect a lot of stock market share price movement based on the reception of these results.
Albeit, with the ever-present caveat that the market can, at times, be irrational.
But this financial year, more than most, I’d argue that some irrationality may be warranted…
An unforgettable year, for a lot of the wrong reasons
See, over the past few days, I’ve started to notice something of a trend across the ASX. The daily announcements have been flooded with a barrage of quarterly updates. All of which precede the aforementioned annual reports in the coming weeks.
The takeaway from these quarterlies though, by and large, is that a lot of stocks have had a remarkable quarter. Personally, I’m seeing a lot of impressive growth statistics and year-on-year records being broken.
And at face value, that sounds fantastic.
The kind of development that might warrant further investigation, and perhaps even a buy recommendation.
But we have to remember to contextualise this growth in the environment that it stems from. After all, the June quarter last year was a rather forgettable one for many businesses. A period where investors were trying to sort out the winners and losers of a growing pandemic.
For that reason, on a year-on-year basis, it doesn’t surprise me to see so many fantastic looking figures.
The first half of 2021 has been starkly different to that of 2020. With the threat of COVID-19 certainly still a reality, but a far more diminished one. As businesses have had more flexibility to thrive thanks to ongoing stimulus, and the winding back of lockdowns across parts of the country.
All of which helped the All Ords and S&P 200 hit record highs last month…
Which is why I expect we’ll see a lot of bumper reporting in the coming weeks. With the cut-off date of 30 June for the financial year likely to cement some extremely strong results for a lot of stocks.
The only thing I’m wondering, though, is what the first quarter of FY22 is going to look like.
Because as most Australians are now well aware, things today are very different to what they were just a few weeks ago. Parts of NSW, Victoria, and South Australia are now all in lockdown — placing roughly half the nation into home confinement.
And for many businesses, it could be a death sentence. Especially as there is no JobKeeper to save them this time around.
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Sorting the trash from the treasure
So, as an investor, what does this all mean for you?
First and foremost, it means you’ll want to take upcoming annual reports with somewhat of a grain of salt. Because while FY21 was full of great growth stories, the renewed spike in COVID cases and reactionary lockdowns is already putting a dampener on markets.
It will be fascinating to see how share prices react to these results and the state of Australian society. Particularly for businesses that have a need for physical engagement with their customers.
However, it doesn’t mean that every company is doomed to suffer a tougher FY22, either.
As 2020 hopefully proved to you, even during the toughest of times, some businesses will rise to the occasion. Paving the way for existing and new trends to cement their growth in tumultuous markets.
The most prominent example of this was the ‘buy now, pay later’ boom seen last year.
A trend that may or may not be sustainable in the long term, but certainly made many people a lot of money over the last 18 months. Which is why I urge you not to succumb to total bearishness.
Because no matter how bad things may get, opportunities are always available to be found.
It just might be a little harder to hunt down or put into perspective on a larger time frame.
As Lachlann explained quite eloquently yesterday, it’s about finding companies with the right exposure to the right trends. Something that can help put the odds in your favour when done correctly.
All you need to do then is find the right trends. And in the coming weeks, that is exactly what we plan to do.
Editor, Money Morning
PS: Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.