Reporting season in a nutshell
In our reporting season preview we noted that the spread in consensus forecasts was very narrow and the potential for beats and misses versus market expectations was lower than normal. It is this dynamic that foreshadowed many of the results across our coverage universe, where results were mostly in line with expectations.
Earnings momentum was mixed with no clear directional trend and it is clear market rotation rather than breakout has defined the FY18 reporting season – we are still waiting for the circuit breaker.
Pleasingly, results mostly shrugged off the systemic risks that posed a threat to earnings heading into August (e.g. housing slowdown, weak consumer confidence, intensifying regulatory concerns and political risk). No bad news was welcome news and investors put cash to work by backing solid inline results.
Investors have to be more tactical given the current market settings of elevated valuations and cautious sentiment.
Watch
Three changes to our list this month
We add Australian Finance Group (AFG) and Noni B (NBL) to our list in September.
For AFG, we believe concerns about regulatory risk regarding broker remuneration models as well as consternation about the cooling housing market are overdone. Such concerns have resulted in this stock offering good value and an attractive dividend yield.
Noni B now commands approximately A$1bn of sales and a material portion of the womenswear market. This should enable NBL to rationalise an industry which has been primarily focused on volumes and discounting, and in doing so increase profitability over time.
We remove Suncorp Group (SUN) this month following the solid result in August and the completion of the Life Business sale. Despite the removal, Suncorp still remains our preferred exposure in the large-cap diversified financials and insurance space.
Nine high conviction stocks in September
Our high conviction stocks are those that we think offer the highest risk-adjusted returns over a 12-month timeframe, supported by a higher-than-average level of confidence. They are typically our preferred sector exposures.
Here are our seven high conviction stock picks this month:
- Atlas Arteria (ALX)
- OZ Minerals (OZL)
- Westpac Bank (WBC)
- Australian Finance Group (AFG)
- Noni B (NBL)
- CML Group (CGR)
- Kina Securities (KSL)
- PWR Holdings (PWH)
- Volpara Health Technologies (VHT)
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Disclosure of interest: Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.
