Low expectations could be a blessing in disguise
Recent volatility has set a cautious tone, but stocks enter the February reporting season with far lower expectations upon them and at attractive valuations not seen since 2014. Elevated valuations have proven to be a difficult hurdle over the past reporting seasons with many high PE names stumbling by failing to deliver on high expectations. Those expectations are now far lower heading into February.
With that in mind we think recent weakness is a tactical blessing for investors looking through macro uncertainty, who were waiting for more attractive entry points into our best ideas.
Focus on total returns
The 'yield' trade has come back into focus. A mix of slowing economic growth, talk of interest rate cuts, changes to franking credits and companies dialing back expansion capex has created an ideal environment for yield investors. We think upside surprise to capital management will feature in February.
Investors have sought safety in quality high yielding names in the recent period of volatility, and we think they will be rewarded. We expect to see this trend continue as earnings growth expectations moderate.
A franking credit sugar hit?
Tactical investors may benefit from an environment where corporates with large franking balances could bring forward plans to buy-back shares and pay special dividends, ahead of potential changes to franking.
Our recent research note (Implications of a potential change in Government – Morgans clients can login to view), steps through our views on how Labor's key policies may impact investors if enacted in 2019.
Key candidates to release surplus franking credits include Woolworths (WOW), Wesfarmers (WES) and Flight Centre (FLT) while we also flag corporates with strong ongoing outlooks for capital management.
Tactical positioning into February
We think that avoiding the downside is as important as identifying the upside in the current climate. Our Research Team have flagged key candidates for potential upside and downside reactions to results relating to reported earnings, outlook statements, capital management and/or other catalysts:
Earnings beat/Positive outlook – Treasury Wine Estates (TWE), Jumbo Interactive (JIN), Acrow Formwork and Construction (ACF), Corporate Travel Management (CTD), Medibank Private (MPL) and Baby Bunting (BBN).
Strong capital management potential – Woolworths Group (WOW), Wesfarmers (WES), ERM Power (EPW), Flight Centre (FLT), Whitehaven Coal (WHC) and Insurance Australia Group (IAG).
Oversold, but expecting an in-line result – Reliance Worldwide (RWC), Kina Securities (KSL), Origin Energy (ORG), Emeco Holdings (EHL), Coronado Global Resources (CRN), Apollo Tourism & Leisure (ATL), Monash IVF Group (MVF) and Adairs (ADH).
Earnings miss/Softer outlook – Sydney Airport (SYD), Superloop (SLC), Pact Group (PGH), Invocare (IVC), Ansell (ANN), Ramsay Health Care (RHC), JB HiFi (JBH), National Tyre and Wheel (NTD), Motorcycle Holdings (MTO), Bapcor (BAP) and Automotive Holdings (AHG).
Overvalued or avoid – Speedcast (SDA), Blackmores (BKL), Bellamy's (BAL) and Inghams Group (ING).
Additional details regarding our reporting season hit and miss candidates are provided in the Reporting season preview research note (Morgans clients can login to view). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Our Reporting Season calendar for February 2019 includes all the reporting dates and our company recommendations and comments.
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