Rudi’s four tips for reporting season success

Over the next three weeks, the majority of ASX listed companies will open their books and give investors a clearer picture of their health and their future prospects. Rudi Filapek-Vandyck from FNArena has dedicated the past 17 years to analysing company results and says that reporting season is one of the most underestimated periods during the year. However, with hundreds of results being released in close succession, the task of distilling this information into a strategy is somewhat daunting.

In this interview, Rudi explains why he takes a two-level approach to assessing reporting season and offers four practical tips that he thinks can add value to your investing toolkit. He also shares the three stocks that he will be paying extra close attention to in the weeks ahead. 

James Marlay: Rudi, it's the start of February. We're about to kick off into reporting season.

Rudi: Yes.

James Marlay: We were having a chat last week. It's a bit ridiculous that the torrent of information that gets thrust into investors inboxes and over the screens. For a lot of people, it is too much information to digest in such a short period of time. We get fatigue. As someone that's been analysing reporting seasons for 17 years, I thought we'd get you in to have a chat about some of the things that you've learned over nearly two decades of checking out reporting seasons. What I really want to do is see if we can find some actionable strategies and techniques that Livewire readers can put into practise for reporting season.

Rudi: Happy to share some of my insights and observations.

James Marlay: Why don't we start. First question, have you figured out if investors can actually create value in reporting season?

Rudi: Definitely. I think reporting seasons are one of the underestimated periods in the year. I mean, in between reporting seasons anything can happen, and any reason can be good enough to jump on or off a stock. I mean, momentum, technical charting, sentiment, company announcements. You look at the chart, it's going up or it's going down, you lose patience, all of that. But then reporting season comes along and basically that's your check, that's your actual check on whether everything that we were all as a community thinking and predicting and speculating in advance whether that actually is accurate. I'm actually surprised, one of the reasons why we spent so much time on reporting season is A, because very few others are doing it and B, if they are doing it, the details of their analysis and research is actually not widely available. Luckily, now also in cooperation with Livewire, we are making some of that analysis available, which I can only assume investors will very much appreciate that.

Rudi: We're devoted to it the whole year around. So we don't just do February and August, but we also do the in between. Because people might actually underestimate how many companies are reporting in between. I mean we're like the likes of Aristocrat Leisure, TechnologyOne, Incitec Pivot , some retailers and then some other technology stocks. But if you stick to February and August, and I think this is quite important, because very, very underestimated both by professionals and by retailers. There's a two level approach I would choose to assess a reporting season and one is the macro-level, so the higher level which goes beyond the individual stocks and the other one is obviously the individual stocks. And usually all the attention goes out to the individual stocks. But there is that higher level and it is very, very important.

Rudi: Because at the end of the day, investing is not just looking at an Excel sheet, it's not just looking at the numbers. There is that ultimately really, really important ingredient and that's sentiment. Because at the end of the day it's investors doing the buying and the selling and we are so driven by sentiment. Sentiment is really, really important because reporting seasons set sentiment and not just for individual stocks but for general themes. I'll give you an example, we come out of the Trump election in late 2017, everyone's talking about reflation trades. We get the February reporting season in 2018, that February reporting season sees the likes of Altium, Appen, WiseTech and etc., put in such strong performances that they basically turn into the out performers until the next reporting season, irrespective of the whole wide world talking about the reflation trade. That's an ideal example of how a reporting season completely reverses the trend.

Rudi: And that was because it was showing investors that the fact that they all of a sudden started buying the banks and resources stocks and the cyclicals and they were abandoning the CSLs, the Altiums and the Appens. That proved to them that that strategy was not the right one and you get a complete reversal of that sentiment and everyone can look this up. I remember that reporting season very, very well because you would often see the share price trending lower, leading into the result and then make a jump of 15, 17, 18, 20 percent in the day. And that's one prime example of how reporting season. Coming out of it sets a complete new trend for the market and that trend continued into August.

James Marlay: So the macro is a broad set of company results, a cluster of stocks, a segment of the market delivering numbers that set a trend and focus the market's attention.

Rudi: If you come back from the macro-level, which I have to emphasise it, has so far the reporting seasons over the past few years have continuously benefited the performers in the market. And what I mean by that, is the guys who were performing three or four years ago are still performing today and I note that expectations remain high for this year and the early indications are, for example, ResMed has performed, and again beaten market expectations. So there is a trend there that if you were taking the Chinese approach you would stay on board with that trend. I mean these guys performed this is also my favourite hunting ground. If you basically investing in particularly in reporting season is all about getting the trend in earnings correct. Now, why is that important? Because we get warnings, profit warnings.

Rudi: We've had a few now, Nearmap, Treasury Wines, we basically had like 15 or 17 other companies issue warnings, Flexigroup this morning, IOOF. The reflex from investors is always to become interested because those share prices often get clobbered. I mean they go down by 15% in a blink of an eye and then investors get interested. Surely that's an opportunity. Those who own the stocks often have a response of that's a bit of an exaggeration, it'll come good. But I think that's not the right way to look at those stocks. I mean I think the right way to look at the individual stocks is that you look at what the trajectory is that the market is basically assuming for those stocks. Like are they growing between 15 and 20 percent for the next three years, for example. That's why the share prices is where it is.

Rudi: If a profit warning comes along, Treasury Wines is a very good example of that one. All of a sudden the market resets those expectations to between 5 and 10 percent. The positive view is, that's still growth. It's correct but we come from 15 to 20 so that is essentially very bad news. So the share price gets clobbered and deservedly gets clobbered. Because so many people lose money along the way down that that share price is probably going to be in the doghouse for quite awhile. In particular because a profit warning always reveals that not everything is under control and in this case it was. So it probably will take time for management to get that right. In the meantime, it's anyone's guess what the share price will do, but low expectations are probably the right way to go. In a very general sense, if a company outperforms the reporting season, it can last up until the next reporting season, potentially, that the share price gets that boost. As long as the market expectations lift because of it and then obviously the valuation lifts and as long as that is not already well priced in.

James Marlay: You've alluded to it a few times already, but this concept of post earnings announcement drift.

Rudi: Yes.

James Marlay: Can you give people just your take on whether that is a real effect in Australia, and how they might be able to use that to add value to their investing?

Rudi: I can give some very practical examples, but also we have to realise, all of us, that things change. There are lots of market participants in the market that observed the market as I do. And everyone learns from the past. I'll give you a few practical examples. For quite a number of reporting seasons, a company like REA Group, which is about to report. They would report and the share price would always fall after reporting. Now I'm a big fan of REA Group, I'm a long-term shareholder. And again, that's where the difficulty comes in, in assessing whether the disappointment in reporting season, whether it actually changes the trajectory that the company is on. So every time, often you see the share price running up before the release, the release comes out or it's not as good as we thought.

Rudi: Sometimes the share price goes down by 15% or something ridiculous. You blink twice and by the next reporting season it's up by 15 or 20 percent. So it's the change between the fall after report and the next report season is massive. The trend by the way, keeps on going up. This is one of the share prices that basically trends higher on pretty much a consistent basis throughout the volatility. Last year that didn't work. Investors learned from the experience from the previous years that they thought we not going to sell this stock, it's stupid, because it's actually a winner. That's just one example how things change. Another one of the companies I own, but that doesn't report this season is TechnologyOne and TechnologyOne used to have this pattern every time that it would just linger around for a while.

Rudi: Then investors realised it's going to report next month. So the share price would gradually lead in the report, which is run up and would sometimes it would be rallying strongly. Then the report comes out, it's okay. Then the share price just basically trends lower because they're all taking profits because it can't go higher. Now that mechanism changed last year as well. The advice would give to investors is know your stocks. Like I know TechnologyOne, I know CSL, I know REA Group, I know what's important for those companies. I know that if there's a little niggle here or a little niggle there and that causes a share market price to fall, that is not going to change the long-term trajectory of a stock. I'm happy to sit there, wait to see what happens and I might actually buy some extra shares. You also have to observe those stocks because those lessons you can learn. For example, if a stock tends to run up leading into the results and then selling off afterwards, those are things you can incorporate in your strategy.

James Marlay: Do you believe that there's a pattern?

Rudi: You can tell the patterns. Like one of the patterns that yet has to change is that short positions in JB Hi-Fi increase pretty much every year before the results release. And then the result comes out and they have to cover. That has now been happening, from memory I think, four years maybe longer. That's going to be interesting whether that's going to survive this month as well. Are the shorters still very confident that their position is correct. I think the odds are again in favour that they will beat the expectations again. It's not for nothing that analysts covering the stock call it probably the best retailer in the world and indications are there that while segments of the retail sector are doing it tough in January, they've actually been doing quite okay.

Rudi: I think the answer again that the shorts will have to cover and that's again one of those observations you can remember and you can take into your strategies.

James Marlay: So you've got two points so far, know your stocks.

Rudi: Yes, definitely.

James Marlay: The second one is observe the patterns.

Rudi: Observe the patterns, yes, they can change. But sometimes they don't immediately change. Sometimes they last for quite awhile.

James Marlay: What else is on your checklist for investors?

Rudi: There is that fear that if a share price rallies on the day of release that you can't get on board anymore. And in many, many cases you can. I know everyone has that fear. I have it too. They have that thing that the share price is running away from you. You have to assess a little bit where the share price is and where the upside comes from. But there's in particular the case, when it's a balance sheet issue or when it's a stock that comes out of a very bad period. Because this is where I think, you can as an investor, you can leave the first percentage an upside to others because you are reducing your risk. I think the lower risk strategies still remains that you wait for the results to come out and you see how that changes things and sentiment. And if it's good, you get on board. If it's bad on the other hand, while I don't sell on the first day, I do sell and I do sell, irrespective of what I paid for the share price.

Rudi: My advice to investors always is, it's never too late to sell. You only have to look at the share price graph of Slater and Gordon, that you better sell when things go bad. It doesn't matter if you paid even 30, 40 percent more for the share price, it can go lower. And companies like RCR Tomlinson for example, or Forge, they actually go bankrupt. So it's never too late to sell, even though I know we get hooked on that we paid so much more for the share price, I don't want to look silly or the usual one, I want to wait for a higher level and sell then. If the whole market is thinking the same way, you're not getting out.

James Marlay: The first thing you're saying is, if you don't have to own a stock, don't buy a stock for a result.

Rudi: Yeah, I think it's extra dangerous because even an excellent performer, like a CSL for example, which is amongst the best performers in the market. Even at times because it's a sentiment thing, they can disappoint. It's not impossible. Because the share price performed so well, it's up something like 60% plus from the 1st of January last year. It can easily shave off, I'm just picking something, 7, 8, 9 percent or whatever. If you're not on board yet and you want to get on board, then you can leave it, you're not necessarily in a hurry. Because if the share price goes up, it'll go up. And in particular, now when we have a macro picture that at times we'll just push everything down. Ideal scenario, I've said earlier, ideal scenario is you have a great performer coming out can't really get the share price up because there are other elements in play and well that's the kind of stock you want to own.

James Marlay: Rudi, I've got your checklist there. You've mentioned a number of stocks throughout the discussion today. But if you could put together just a short handful of stocks that you think look interesting, maybe where there's been that macro suppression of expectations with underlying performance could surprise on the upside. What would be your top three or four picks?

Rudi: Stocks I own myself, which definitely I'll be watching this reporting season. I always watch CSL. Right, that just goes without question and I almost never sell CSL. Not even if the share price goes temporarily lower.

Rudi: Companies that definitely look interesting to me is for example, Amcor. Amcor has been held back, amongst other things, they have a big acquisition in the US. There's a general question mark over the long-term future of disposable plastics and about plastic packaging in general. This result could be one of the ones that sets off Amcor for quite a big upswing, but again, we don't know in advance. We have to see what management comes out. When you have a stock like that, that has that scepticism hanging over it. If management comes out and goes this is what we're doing, this is what's happening, it's all looking great. Like a GUD, share price can go up until August and beyond. Another stock that has been a little bit in that question mark corner is Bapcor. I personally like Bapcor, a lot. I think the business is much more resilient than the share market at times it gives management credit for, but we'll have to see again. I'm expecting quite a resilient result. Hopefully it turns sentiment into the positive, but it's very difficult to gauge that in advance. But those are definitely the stocks on my radar.

Rudi: Watch the little niggling disappointments and often it's not much, but it's a succession of. I remember, before the really bad news hit Isentia, they had three or four reporting seasons. There was always something that wasn't quite right in the reports. I know now that's a sign. That's a signal. That's alarm bells ringing, pay attention.

James Marlay: Okay. Well Rudi, we've got some ideas on a few stocks to watch. You've given us a few of your tips for navigating reporting season. We're publishing your reporting season monitor on the website throughout February and you're about to get busy bashing out all your notes on reporting season.

Rudi: It's going to get busy.

James Marlay: Thanks very much for coming in.

Rudi: My pleasure.