ASX murder club: Inside reporting season

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They say that it is better to travel hopefully than to arrive. That is certainly the case for the latest Netflix bland butchery of one of my favourite recent books. The Thursday Murder Club promised so much and delivered so little in the end. Having devoured all the books in the series, it was fair to say that I was eagerly anticipating the film. A stellar cast, a great story, and considerable hype leading up to its release. Then only to disappoint. It was so Americanised and bland as to be inoffensive to any and entertaining to a modest degree. The Thursday Murder Club does have some parallels for investors and the ASX reporting season. It too became a Murder Club! In fact, not only Thursday, but every day really. Icon after icon was slain on the market as analysts’ forecasts were dashed, outlook statements were wishy-washy and stock prices fell.

I have not seen a reporting season that claimed so many casualties. Not only were moves extreme and violent, but we seem to have had so many. Maybe it just felt that way as fear gets more clicks. Icons were for the hunting though. CSL (ASX: CSL) crushed, Woolworths (ASX: WOW) devastated, James Hardie (ASX: JHX) squished and Domino’s Pizza (ASX: DMP) fell over. Even former darling Guzman y Gomez (ASX: GYG) was hit. It does trigger a few questions for investors. Are blue chips (or former blue chips) a safe place to invest? Are these companies really complying with continuous disclosure requirements? And what if the analyst forecasts are pretty much a waste of time and just a guess? The latter certainly seems that way. Is it the companies at fault, or are the analysts just rubbish?

Continuous disclosure would seem to be an issue here. Companies like WOW and CSL have had plenty of opportunities to massage the market expectations down. Why then do we see 20% moves on surprise results?

Maybe the answer is not with the companies or with the analysts, but in the new world of algos and computerised trading. After all, the retail investor barely has time to get his or her head around the numbers before the carnage begins. Is it all these retail investors bailing? Are the instos just taking flight and fright, or are the traders seeing stop losses triggered and then a cascade effect? It is enough to make you question why bother with trying to pick stocks that will do well.

But before you give up and go all in on ETFs, there are certainly companies that delivered. Again, maybe we should have known that they would, but some have shot the lights out. Lovisa (ASX: LOV) recently, Brambles (ASX: BXB), Aussie Broadband (ASX: ABB), Coles (ASX: COL) and even Qantas (ASX: QAN). So, it’s not all doom and gloom for stock pickers. If you get it right and have done your homework, you will outperform by a factor of many times the index ETF.

This is why it pays to have a diversified portfolio. It also pays to listen. Take CSL for instance, it ran hard into the results as money was switched from Commonwealth Bank (ASX: CBA) and the ‘boring’ banking sector into other defensives. That worked until reality came home to roost. CSL was always going to be a difficult result. We had seen the new RFK Jnr assault on vaccinations and the Trumpian view on healthcare. We had seen a new heart drug fail and we knew that the company had been struggling a little, yet we were surprised when they confirmed this. Every analyst ever in CSL is bullish. It is un-Australian not to be. Even now they are still bullish, although the price targets have been lowered considerably to better reflect the reality of the new share price. They all still love CSL, hanging onto the memories of the good old days. But hell hath no fury like an analyst wrong.

Reporting season is now over, and the dust will settle. The computers can relax and stop hunting for technical levels that can trigger a mass exodus and stop losses going off like that frog in a sock. Wounds will be licked, fingers that were burnt will be bandaged and in time we will get our confidence back. We will venture back into the water of picking stocks. Those that delivered will bask in the glory of that for some time. Those that failed to launch will struggle and will rely on a catalyst to break the cycle. That will be updates at the AGM.

What can we then take into the next Murder Club season? First of course, do not disappoint! Seems obvious but still holds. It is also paramount to use our common sense and even the Mark 1 eyeball to see what is going on in the real world. Analysts live in ivory towers far removed from everyday experience. Maybe we need to go to Woolies more and see what is happening on the ground. Maybe a trip to Coles will be worthwhile to gauge the difference. We certainly have to stop relying on the companies to keep us up to date with continuous disclosure. All those conference opportunities. And yet they still don’t come clean.

JHX would have known that things were turning down for some time. If they didn’t, you would have to question management data it was seeing day to day. Not only did they conceal it from existing shareholders, who they treated with such disdain, but also from the new Azek shareholders that took stock in JHX. A serious failure of management. They should have known that the market would treat them badly. And now has yet another reason to avoid JHX.

Do you give up on stock picking? Some may. Some may throw their hands in the air and say it is all too hard. Maybe it is. Maybe though you just have to build resilience. Accept that you will get the odd one wrong. You will have the odd surprise in your portfolio. Some will drop hard, but counter that with the winners. And there have been some big winners. Even the likes of IDP Education (ASX: IEL) have shown bears a clean pair of heels. And the shorts have been seriously punished this season, with some of the big resource shorts outdoing themselves. Pilbara Minerals (ASX: PLS) is one. IEL fell into that basket. Up 30% on its results day. Extraordinary.

And there are others. BXB, which is supposed to be dull, was anything but. Even Origin Energy (ASX: ORG) did well on its results. The likes of Codan (ASX: CDA) were spectacular. There are winners. NextDC (ASX: NXT) and Austal (ASX: ASB).

Volatility does create opportunity. What is apparent is that the companies doing badly are obvious in hindsight. What is less obvious is how extreme the moves are.

The bottom line

Next reporting season, come armed:

• Don’t rely on company spin.
• Question analyst consensus.
• Expect faster, wilder moves. Volatility is here to stay.
• Diversify, but don’t dilute conviction.
• Work harder at building a diversified portfolio that you know intimately.
• Use your own eyes – the Mark 1 eyeball beats any model.
• Stick with stories that have catalysts.

Maybe keep a stiff drink handy for results season. You may have to drown your sorrows or hopefully celebrate your outsized returns. Don’t give up on building a resilient portfolio of stocks, just work harder and think more about the companies you invest in. It really is worthwhile in the end.

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