Reporting Season: the good, the bad and the ugly

Reporting Season: the good, the bad and the ugly

With reporting season coming to a close, it’s worth doing a review of some of the standout performers (and disappointers) of reporting season with a focus on stocks Rivkin owns or recently owned. Although the main stock index, the ASX 200, barely moved during this time, there was plenty of action under the covers with some large moves in both directions. Reporting season is a time when management forecasts are put to the test and for growth stocks, even a small miss of expectations can have disastrous effects on the share price. Of course, this can work the other way too, and companies can receive a significant boost to their share price from their earnings announcement. The best way to illustrate is with some examples.

Starting with the surprisingly strong performer, Flight Centre Travel (FLT), the market was very impressed with the result. Theoretically the industry faces significant headwinds with more people booking their own trips online (while FLT still retains a huge bricks and mortar presence) but FLT has been impressing the market over the last six months. Back in July, the company moved their guidance to the top end of their prior range but even with that the full year results released at the end of August still pleasantly surprised the market. The share price rose around 10% on the day and since then has held onto most of that gain. This is a holding in Rivkin Local’s momentum strategy and so long as the share price keeps rising, we will continue to hold.

Most people would accept that the market is at least to close to being efficient, but some stocks appear to contradict this theory. Qantas Airways (QAN) announced its results before market open on 25 August with results that seemed as good or better than expected on almost all measures. The stock price, however, fell over 3% in the minutes after the stock began trading. This isn’t unusual as any investor will know how difficult it is to predict the direction of a stock after an earnings announcement, even a seemingly good one. The market is so forward looking that the expectations of future performance can counteract the effect of any given set of current results. What was strange in the case of QAN was that within the very same day, the stock not only recovered all of the losses but finished the day UP by approximately 3%. With no additional news out during the day, one could be forgiven for thinking that the morning traders ‘got it wrong’. While we will never be able to explain these short-term moves, the Rivkin Local momentum strategy, in which we hold a position in QAN, looks at the long-term price momentum of ASX 100 stocks to determine our trade entries and exits.

Not all stocks outperform during reporting season and certainly some stocks grossly underperform. Bluescope Steel (BSL) had been a momentum holding since November of last year during which time it had performed exceptionally well. We had a small stroke of fortune that saw BSL’s momentum drop by enough to have it rebalanced out of the portfolio in the middle of August. A few days later, on 21 August, BSL reported its full year results which actually proved to be a big disappointment for the market. While the results for FY17 were very good, the market appears to be concerned about rising energy costs which have recently become a serious problem for energy intensive businesses, not to mention the unexpected retirement of popular CEO Paul O’Malley. There is much debate over why Australia’s energy costs are rising so fast and it is likely to be caused by a combination of factors rather than just one but the result is that BSL had to devote several slides to the issue in its investor presentation. BSL forecasts suggest that electricity costs will rise by 52% in 2018 and gas costs will rise 6.6%. This could cut into BSL’s margins and has certainly scared the market. The net result was a 20% fall in share price following the announcement highlighting the fact that reporting season can be a volatile time for investors.

Rivkin’s trading strategies are largely systematic and have been back-tested over a large number of years that include a large number of ‘reporting seasons’. It is this that gives us the confidence to stick to the strategy during these times whether the trades are going for or against us. 

Ready to chat about your portfolio? Get in touch today via email: or by phoning +612 8302 3633.   

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