The real winners of the February season

The local December-half results season in February had its own script in mind, as also illustrated by the interim result release from California, USA headquartered Life360 (360) on March 1st.

It's not often Australian investors see a sizeable earnings 'beat' being rewarded with a 38.5% rise in the share price, not to mention the double digit follow-through that occurred on the following Monday.

By the market's close 7.87% of that follow-through was left for a 46%-plus gain over two days, which neatly summarised what February 2024 was mostly about:

-both analysts and investors had been too cautious in many instances, which provided a platform for big corrections upwards

-a two-year bear market for smaller cap companies also meant share prices proved too low

-consumer spending is still fine, both locally and overseas

-management teams have a much better grip on limiting cost growth

-the sky is literally the limit for technology companies, both large and small

That seldom witnessed melt-up experience for shares in Life360, provider of tracking services for family members and pets, is the result of an undervalued starting point in combination with operational momentum that has forced analysts to significantly upgrade forecasts, valuations, and price targets.

For investors, to understand the full message emanating from the Life360 share price explosion, both items supporting the share price move are equally significant.

I would actually argue the second part is the most important factor as numerous other technology-driven companies have equally enforced significant upward corrections in operational estimates and share prices, without starting from a beaten-down, too low share price level.

Spoiler alert: it is not just a smaller cap phenomenon either.

Goodman Group (GMG) has been one of my personal favourites in the local share market for numerous years and with a market capitalisation of circa $57.9bn it is one of the largest index constituents on the ASX.

Yet, its financial release too put a rocket under the share price and left analysts in awe, scrambling back to the drawing board to remodel upgraded forecasts and valuations.

It wasn't that long ago when investors on my X feed were seen discussing whether Goodman Group shares at $24 were 'fair value' or 'expensive'. Now the shares are trading above $30, backed by significant increases in analyst valuations. The current high-marker is Citi with a price target of $32.50.

It goes without saying, Goodman's story did not start last month, or even last year. Australia's largest property developer has gradually transformed itself into a large funds manager and developer of mission-critical assets for key customers, such as Amazon, around the globe.

That large hyperscale warehouse with all the latest modern technologies embedded inside that is facilitating Amazon's e-commerce expansion worldwide has probably been designed and build by Goodman Group.

That operational transformation has not gone unnoticed, of course, and what was once a share price judged by the dividend yield on offer is now priced as a growth stock.

At the current share price, the forward-looking yield is no more than 1% with price-earnings (PE) ratios of 29x and 27x on forecasts for FY24 and FY25, respectively.

Those numbers look way over-the-top for what is, officially, Australia's number one REIT. Those who look at Goodman Group from a pure property-REIT perspective have been calling the shares overvalued for many years now, to no avail.

It reminds me of the long-winded discussions whether US-listed Tesla is an ordinary car manufacturer or a multi-platform technology innovator.

As it turned out, the market cares not what misguided labels are being used by dyed-in-the-wool value investors who refuse to accept that technological disruption and innovation have become the two major driving forces inside the global economy during the present decade.

In Goodman Group's case, the positive carry from exposure to the steady awakening of e-commerce, a process with a very long tail, is now combining with the faster-than-anticipated acceleration in demand for data centres on the back of the world's investment race into generative AI.

Industrial property development (think those warehouses) remains Goodman Group's main bread-and-butter, alongside funds management, but data centres are re-shaping the company's future.

Data centres currently make up some 37% of work-in-progress, which is circa double the percentage from pre-covid, and compares with circa 25% share in September last year.

By next financial year already that percentage is expected to exceed 50%.

The secret sauce, so to speak, is that margins on data centres are a lot higher (roughly double those on warehouses, at circa 60%), hence Goodman Group as a whole is looking towards accelerated revenues on increased margins.

That can only mean one thing: a (much) higher valuation. Quod erat demonstrandum in February.

Adding some extra colour to the above: Goodman Group's work-in-progress amounts to circa $13bn, so the numbers involved are large, really large.

No double-guessing why Craig Scroggie, CEO of data centres operator NextDC (NXT), appears at media interviews with an extra spring in his step these days.

NextDC is equally enjoying operating at the right place, with the right business model, and the right track record and client base to find itself overwhelmed with demand for more and bigger data centres.

In case anyone still had any doubts: generative AI is awakening a seldom witnessed tsunami in fresh technology and hardware investments. Investors in US equities are already familiar with the theme as the likes of Nvidia, Microsoft, ASM Lithography and AMD have been propelled into a different stratosphere on the back of enormous growth in demand.

The February results season locally has effectively communicated to investors in Australia: the new era of tomorrow's future is real and tangible, and the ASX has major beneficiaries too.

Apart from the companies mentioned, these also include Macquarie Technology (MAQ), Megaport (MP1), and Dicker Data (DDR), as well as Car Group (CAR), Cochlear (COH), Hub24 (HUB), Netwealth Group (NWL), REA Group (REA), ResMed (RMD), WiseTech Global (WTC), and others.

Companies mentioned in the second half of that sentence are not necessarily carried by the same megatrends as are Goodman Group and NextDC, but they are equally disrupting the status quo and using technology to successfully reshape the world to their advantage, enjoying the prospect of many more years of strong growth ahead.

Discretionary retailers delivered many positive surprises during the season past, predominantly because analysts' forecasts were proven too cautious despite widespread mortgage stress and a cost of living crisis, but technology has been the real outperformer in February, as also identified by analysts at Macquarie.

Share price gains of 48%, 32% and 29% respectively for Megaport, WiseTech Global and NextDC underpin that statement, but underneath the surface all have enjoyed significant increases in forecasts, which has propped up market forecasts overall throughout the season, in multiple ways.

Let's not get side-tracked by labeling or what makes a technology company or not: Goodman Group's consensus target lifted in February to $29.11 from $23.90 (up 21.70%), NextDC's price target jumped to $18.77 from $15.23 (up 23%), Life360's target is now $13.62 versus $10.44 pre-result (up 30%).

As we are in the process of finalising reviews, updates and statistics for the February season, it becomes clear early euphoria on surprises delivered by discretionary retailers has not been sustained throughout the rest of the month.

The numbers have kept on worsening with the percentage of 'beats' sliding, and sliding, and sliding to circa 33% with 27.5% disappointing and the remaining 39.5% reporting and guiding in line.

What is important in this context is the FNArena Corporate Results Monitor assesses on a wholistic methodology, taking into account forecasts versus actual outcome, but also qualitative items, forward guidance, dividend payout, trading updates, et cetera.

Simply reporting a slightly better-than-expected net profit on a lower tax rate and reversal of a prior provision won't cut the mustard and if you happen to report a fantastic performance with a subdued outlook, well, you're in the naughty basket too.

What is worth highlighting is the overall percentages look less attractive if we limit our assessments to the ASX50 and the ASX200. The 50 largest cap companies generated decidedly more misses (41%) than beats (29.5%) while the numbers for the ASX200 can almost be summarised as one third-one third-one third.

Thanks to the small caps thus, the season overall hasn't been too bad.

Reporting seasons usually take a slice out of earnings forecasts, reducing the market's average, but this time around, Macquarie reports, the net forecast has remained unchanged, with technology and discretionary retailers the two sector stand-outs.

Also pleasing is the fact price targets on average, and in aggregate, have gained throughout the month.

Prior seasons have seen targets fall or hardly gain on a net outcome. The last time we registered notable target gains was in August 2021.

The main detractors in February have been resources, media, and healthcare, while telecommunication proved a rather weak performer too. Both materials (miners) and energy are the worst performers in share prices as well as in reductions to forecasts.

Post February, the strongest growth forecasts reside with technology (by multiple arm's lengths, see the above for explanation), with utilities second and healthcare third. The lowest forecasts are reserved for energy (worst), materials, and financials.

Among notable disappointments were Newmont Corp (NEM), South32 (S32), Whitehaven Coal (WHC) and even Alumina Ltd (AWC), which ironically serves partner Alcoa in its acquisition intention.

Also remarkable is that Altium's (ALU) release would have seen severe share price punishment, if the stock wasn't under a heavy premium take-over bid.

In quant terms, Mid-Cap stocks have been the place to be, with Growth coming second. Dividend payers proved a recipe for disappointment, no doubt reflecting the many dividend cuts and disappointments throughout the month.

What looks expensive today might well look a whole lot more attractive in the months ahead. Share markets seldom move in an uninterrupted straight line upwards.

There will be volatility and share price weakness. Investors not yet on board with some of the strongest growth stories on the ASX should draw up their wish list and wait for opportunity to come.

Your typical value investor, of course, would rather talk about insane, hyped-up valuations and the formation of the next bubble. Horses for courses!

Always make sure you know your own investment objectives and your own risk appetite and strategy.

Investing in well-oiled growth companies trading on higher valuations is not by default a higher-risk strategy. I'd argue buying cheap looking, low-quality companies when the world around them is changing rapidly is.

As they say, different narratives is what maketh the market. The world is changing right in front of our eyes.

Being part of that change is a choice, as is not being part of it.

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