Right now, the Australian stock market is in the middle of reporting season with companies sharing their full-year results. While it provides investors with insights into a company's financial health, it can also be a very challenging time for investors, as stock prices tend to be very volatile.
In some cases, despite announcing record profits some companies fall heavily while those that announce record losses rise. It all comes down to the expectations from the big end of town and whether the company has missed expectations. In other words, if the big end of town believes a company’s profit should have been higher, they may sell the stock. Similarly, if the loss was less than they were expecting, they may buy. Confused? You are not alone, many investors find reporting season very confusing.
It’s important to understand that reporting season is more for the big end of town than individual investors, so it’s a good idea to bury your head in a book or go on a holiday during this time as you won’t miss much. That said, some investors treat reporting season as a critical period that they need to pay attention to. So, here are my tips for navigating reporting season successfully.
You need to know when reporting season starts and ends, and the dates the reports will be released for the companies you are interested in. In analysing the results, it’s a good idea to compare this year's results with the prior year, as well as other companies in the sector. Once you’ve analysed the reports, you can decide which stocks you want to buy or sell based on the results. Remember, analysts can have biased opinions, therefore, you need to set realistic expectations based on their views and do your own research.
As I always say, short-term fluctuations in price as a result of reporting season are largely irrelevant and should be ignored because the longer-term trend is more important. While it can be very enticing to purchase a stock that is rising strongly in the short term for FOMO, this can lead to poor returns after reporting season ends. That’s why it pays to wait until after the volatility of reporting season ends to review your portfolio and the companies you are interested in buying because you’re less likely to get caught up in the emotions of the market.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au.