Homework prepares for reporting season

Published in the Daily Telegraph, March 2015 by Dale Gillham

The lead up to reporting season in Australia often sees investors bracing themselves for the bombshell that sends their shares tumbling.

So, what happened this reporting season and what do you need to be aware of to prepare for the next round?

Each year there are two major reporting periods for Australian Securities Exchange listed companies — February and August.

You can find reporting dates on the company’s website, or contact the company’s investor centre. This way you know in advance when the important dates are for the shares you hold.

It’s not until a company reports to the market that you get the chance to find out what’s going on.

However, sometimes a company will make announcements to the market outside of those dates to keep the market informed.

At reporting time, you will quickly see which companies are winners, or where results meet or exceed market expectations, and those that are losers, where they don’t.

So, how do you tell the winners from the losers?

For those who can’t read a price chart to work out how the share price is more likely to run, you could rely on someone’s opinion by considering analyst expectations, but who do you trust?

Or, you could wait for the day of the announcement to gauge the market’s response to the news. If your shares are losers they will fall. If they are winners your shares will rise. It’s that simple.

One loser this season was Woolworths (WOW), and it is easy to see on a daily price chart how the market voted.

The share price closed at $33.95 the day prior to the company’s announcement and then fell by about 9.5 per cent on February 27 to $30.70 when the market opened.

Not a pleasant experience if you are a WOW shareholder. Perhaps you were totally unprepared for the sell-off.

More negative news from WOW didn’t surprise those watching the company’s price chart, as it showed the potential for a fall.

When a stock price has been trading in a strong downtrend, like WOW has, your risk of a further fall remains high.

And, a falling share price is vulnerable to negative news.

It doesn’t take much for buyers to run for the hills and those looking to profit from a falling share price to see dollar signs.

Given the dramatic fall in price over the past year, and the trend line that WOW was trading below on the weekly chart, the analysis indicated that price was likely to stop rising at around $33.50 and fall.

It managed $34.71 before the sell-off. I show you how to draw trend lines in my bestselling book How to beat the managed funds by 20%.

Come reporting season, analysts want companies to “show me the money”.

However, WOW showed what happens when there is a failure to deliver what the market wants. The companies that exceeded market expectations typically enjoyed a share price rise.

Overall, about 66 per cent of companies reported above their prior year’s result, while 34 per cent were below, and in my opinion this is a reasonable result.

Data shows our market has been very consistent since February 2011, as results for each reporting period showed between 63 and 68 per cent of companies reported results above the prior year.

Given this, wouldn’t you expect the market to be less volatile?

Analyst expectations over the same period, which a lot of investors follow, were actually much more hit and miss. So then, what’s driving volatility?

Perhaps, analyst expectations are having a much greater effect than we realise.

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