Which stocks will present opportunuties?
As the final week of corporate reporting season comes to an end, investors can now breathe a sigh of relief. Despite fearmongering and global uncertainty headlining the news, the Australian stock market has only declined around 6 per cent over the past month.
As a consequence, many investors have been asking whether the worst is over and should they stay in the market or is it better to exit if there is further downside. Before I answer this, let’s take a look at how the last round of companies faired during reporting season.
Companies Reporting this week
Fortescue was the first cab off the rank with profits up 195 per cent due to an increase in production volume, rising iron ore prices and a weaker Australian dollar. The company also announced a $500 million dollar share buyback and a final dividend of $0.24 a share, which was double the previous year’s dividend.
Despite this positive news, shares in Fortescue where heavily sold off on Monday and at one stage were down over 5 per cent, largely due to speculation about future headwinds and softening iron ore prices. That said, I thought this was an overreaction, which the market agreed with as Fortescue traded up for the rest of the week to close higher. This is definitely a stock to place on your watch list.
IOOF’s shares continued to fall further this week after releasing its full-year profits, and at one stage the stock was down around 11 per cent on the prior weeks close. IOOF has been riddled with scandals in recent years and suffered a significant decline in its share price as a result of the Royal Commission.
On the positive side, IOOF announced a $1.4 billion dollar net inflow of funds, resulting in an increase of 18.7 per cent in funds under management and advice. Despite a dividend yield of 12 per cent, it was not enough to keep their shares afloat, as net profit was down 67.7 per cent from the previous year. Final dividends were also down 17.6 per cent to $0.44 a share. Investors would be wise to give this stock a miss for a while rather than trying to get in early to grab a bargain.
Boral was also one of the worst performers this week, as it was heavily sold off after the release of its full-year results. The company reported a revenue increase of 4 per cent from operations to $5.8 billion, however, its earnings per share was down 7 per cent, which was below expectations. A weaker forecast from management for FY20 with an expected drop in nets profit by 5 to 15 per cent also contributed to the stocks sell off. Consequently, its shares plunged over 20 per cent on Monday before recovering some lost ground during the week.
Caltex is also looking worse for wear after reporting a 54 per cent decline in first-half year profits and an interim dividend of $0.32 a share. As a result, the company announced it would be cutting costs by selling 50 petrol stations. CEO Julian Segal is also set to retire after more than a decade in the role. If you ask me, this is a much needed change, given that the company’s shares has significantly underperformed in recent years. This could be the silver lining for the stock; therefore, I suggest you keep this one on your watch list, as it may be the dark horse that does well over the medium term.
Wesfarmers released positive full year results with earnings per share growing 13.5 per cent. It also announced revenue of $27.9 billion and a fully franked dividend (including a special dividend) of $2.78 a share. If you own Wesfarmers right now, this is the time to sit back and enjoy the ride, as this stock looks very positive moving forward.
Afterpay reported positive results, announcing a 130 per cent increase in customers over the past year and an 86 per cent increase in income of $264.1 million with underlying sales up 140 per cent to $5.2 billion. Afterpay also announced a new strategic partnership with Visa to support the development of a new innovative solution to help with business growth in the US market. While everything looks positive for this stock, I would be conservative, as there has been increased competition in this space, so their stellar results may not be sustainable long term.
Woolworths also released full-year results this week with sales recorded at $59.98 billion and net profit, and earnings per share growing around 7 per cent. This stock is looking fantastic at present and I see no reason why this will not continue for the medium to longer term.
As for the top performing sectors, Information Technology was up nearly 4 per cent followed by Materials up over 1 per cent and Utilities, which was just in the green. Energy and Communication Services were the worst performers down over 2 per cent, while Healthcare was just in the red.
Of the top 100 stocks, Reliance Worldwide was up over 10 per cent, Link Administration was up over 9 per cent and with the price of gold soaring right now, Newcrest was up over 7 per cent. Boral was the worst performer down over 11 per cent with Caltex not far behind, and Worley Parsons was down over 9 per cent.
So what do we expect in the market?
Once again, we have continued to experience volatility in the market this week, which is cause for concern for a lot of investors. That said, for a second week in a row the market has shown resilience by rising strongly after falling heavily early in the week, which is also causing investors to become confused about the direction of the market.
While it is possible that the market has fallen into the low that I have been expecting, it is highly improbable given that the market has not fallen far enough. For the low to be confirmed, the All Ordinaries Index needs to fall over the coming weeks down to between 6,393 and 6,218 points. Given this, I expect the market will trade up for one or possibly two weeks between now and when it makes its eventual low between mid-September and early October.
During periods such as we are now experiencing, it is a time to sit back and wait for good stocks to present opportunities, which will occur over the coming months.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au