Reporting season is over and there is a valuable lesson to be learnt by clients and investors.
Too many investors are missing opportunities by taking reporting season figures at their face value instead of looking deeper to see the real story, says Australian equities fund manager, Hyperion Asset Manager.
Investors need to keep in mind how ‘value relevant’ the results are, and figure out whether the announcement alters the forecast timing and magnitude of a company’s free cash flow over the long term and/or the general level of uncertainty or risk arising from those cash flow forecasts.
“If reported profit and other related information does not change these factors, then there is no reason for the profit result to have any impact on the valuation of the company or its share price,” says Hyperion’s chief investment officer, Mark Arnold. “And it’s important not to forget that looking at results over a number of years can really add value in terms of extra information.”
Reporting season does provide valuable information, particularly in terms of sales and earnings growth and a company’s ability to deliver earnings growth though short-term or cyclical headwinds. But Arnold says that the market can become too focused on short-term or cyclical factors that happen outside of reporting season.
He says that market movements outside of reporting season can be relatively more pronounced and can reflect non-fundamental factors such as momentum and speculative activity.
“Look at the massive sell off of Seek Ltd shares during 2008 and 2009 due to concerns about rising unemployment as just one example.
“Having said that, if, during reporting season, the market does drive the share price away from the long-term intrinsic value of a company by ‘over-weighting’ the value relevance of short-term trends, there can be good buying opportunities.”
He says that companies with strong and sustainable value propositions – derived from unique and difficult to copy aspects of their products or services – have pricing power, and the ability to protect long term profit margins and organically grow revenues.
“And that’s the hallmark of a quality company.”
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