Our thoughts heading into reporting season

Our thoughts heading into reporting season

Our thoughts heading into reporting season 150 150 Dominic Mlcek

With corporate earnings season just around the corner we thought we’d kick off 2020 with a few of our thoughts on what we expect for companies to report during the upcoming February results.

With the ASX 200 hitting fresh all-time highs in 2020, it’s understandable that the market and investors might be getting caught up in the momentum. It’s important to note that we’ve actually seen five months of earnings expectations being downgraded. So while the market and valuations have hit all time highs, it’s important that we follow a disciplined approach heading into February and make sure that we objectively assess all of the companies that we own and those companies that might be on the fringe.

The majority of the earnings expectation downgrades have actually come from the banks who have seen 15 straight months of downgrades to expectations from the market. But we do actually see a number of bright spots heading into February, so we’ve positioned our portfolio towards those stocks that we believe are headed for long-term growth. Some of the key sectors we’re looking at include healthcare and IT that continue to provide solid earnings and some of those that haven’t been cash flow positive but we expect to move into that territory in February. We’re also seeing some strong cash flows from materials who enjoyed higher commodity prices. Our portfolios are positioned accordingly with overweight positions in the likes of CSL and ResMed.

Other parts of the market that we see as providing positive earnings drivers for our portfolio include Macquarie Bank. They have been winning market share off the majors as they crack down on compliance and right some of the wrongs that have been impacting them over the last couple of years. Other parts of our portfolio that we continue to monitor and have a positive outlook on are smaller down the spectrum, like companies that are shifting towards the cloud and software as a service (SaaS) such as Xero and Altium. We’ve added these to our portfolio and we expect positive results from them in February.

We’re also watching a few areas that we remain underweight in like Telcos and are cautious on valuations in areas such as the supermarkets.

As always, we’ll be providing up to date reports throughout February as companies report and as we meet with their management. So if you have any questions about these reports or what our views are, please contact your advisor who has access to all of this information.

Dominic Mlcek is a Portfolio Manager at Viridian Advisory

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