Market recovers as reporting season intensifies

Weeks of speculation and heavy sell offs in the Australian share market has seen the All Ordinaries Index down as much as 7 per cent from its all-time high of 6,958 points. Although in one of the biggest weeks since reporting season commenced, the All Ordinaries Index has risen over 1.50 per cent this week.

The recent rise is likely to have some believing that the worst is behind us but this may not necessarily be the case, as there is always calm when you are in the eye of a storm. Markets do not just trade up, nor do they just trade down, given that every trend moves in the opposite direction to interrupt the longer trend for a period of time.

Investors get excited when stocks have fallen heavily, such as AMP in recent weeks, and jump in believing they will get a bargain. This causes the stock to rise for a short period of time only for the buyers to run out steam, and for the stock to start falling again.

While I am confident that the market is bullish over the longer term, investors should be very cautious about buying anything right now, as they could get caught up in a false move prior to the stock recommencing its downtrend.

Now let’s take a look at how the companies who reported performed this week.

Companies reporting this week
Overall, it was a colossal week for those reporting earnings with the consensus being rather positive, although those companies that disappointed where heavily sold off.

NIB Holdings fell over 7 per cent this week after releasing its 2019 full year results. Despite being positive with underlying revenue up 8.3 per cent to $2.4 billion, it was short of market expectations. This comes as no surprise given NIB’s performance this year with its shares up as much as 57 per cent. Therefore, the sell-off is likely related to investors locking in profits and nothing to be concerned about.

BHP headlined reporting season this week with its full-year profit of $12.2 billion, which was more than double last year’s profits. Solid iron ore prices and a weaker Australian dollar have contributed to BHP’s performance over the past year with the company paying a record full-year dividend including a special dividend of $3.35 a share. Despite this, flags of slowing global growth and increasing operational costs had some investors worried, with BHP ending the week down.

Dominos also disappointed the market this week after missing earnings estimates given that twenty-one new stores where added in the past financial year with sales only increasing around 4.6 per cent. The company has traded down over 50 per cent over the past two years, as it has had many challenges during that time. Investors should watch for this one to find support and start to rise, as it could be about to turn around.

BlueScope Steel was heavily sold off on Monday after concerns over weaker commodity prices and earnings outlook. Those who were hoping for a capital return through a special dividend would have been disappointed, as BlueScope announced a $250 million dollar buy back, and $1 billion North Star expansion.

In my opinion, this is a far better move for BlueScope Steel than paying a special dividend, given that now is the time for companies to invest with current interest rates at record lows. I like this stock, and the market obviously does too, as its share price climbed higher this week, so keep it on your watch list.

Brambles was also heavily sold on Wednesday after the company flagged concerns over the US China trade war and a slowdown in Europe, which could stunt growth. While Brambles is down over 10 per cent this week, it is a great stock and worth a look.

Despite A2 Milk’s impressive 41.4 per cent increase in revenue, it was also heavily sold off and was down as much 16 per cent on the day it reported after falling short of analysts’ expectations. That said, the stock has found some support, although I don’t believe it’s enough to halt its fall for now.

Coles released its full-year earnings this week and its shares rose over 4 per cent on Thursday before falling to close up around 2 per cent for the day. Coles is looking great right now, but it may take some time to settle.

Despite profits sliding, Qantas shares rose strongly this week after its earnings were better than anticipated. Qantas flagged rising fuel costs and a weakening Australian dollar as the main drivers for the slump. The better than expected earnings combined with Qantas announcing an off-market buyback worth around $400 million, and a slight lift in its dividends, resulted in the share price rising although only marginally.

Origin Energy shares surged this week on news that revenue from its liquid natural gas business had increased significantly and its underlying profit was up more than 40 per cent. Origin’s announcement of a dividend policy also excited investors, given that it has not paid dividends since 2016. The company also flagged headwinds, as the Government is set to fix basic energy prices for consumers. Given this, it will be an interesting 6 to 12 months for Origin and other energy providers.

The top sector in the All Ordinaries Index this week was Information Technology up over 7 per cent followed by Energy up over 5 per cent and Healthcare up almost 5 per cent. The worst sectors were Materials down over 2 per cent, and Industrials and Communication Services were up just under 1 per cent

.As for the top 100 stocks, Lendlease had a stellar rise up over 23 per cent, Nine Entertainment up over 13 per cent and Carsales up almost 12 per cent. Brambles headed up the worst performers down over 10 per cent with Iluka not far behind down nearly 10 per cent and A2 milk is currently down over 7 per cent.

So what do we expect in the market?
After this year’s stellar run and everything that is happening internationally with the trade war and US reporting season, many are speculating doom and gloom. However, we know that you should never make decisions on speculation and right now the market just needs time to settle to find support before the next rise.

While I expect the market will rise for at least one or two weeks, the down move is not yet over with the All Ordinaries Index likely to fall to between 6,390 and 6,220 points in September. Make no mistake, the Australian share market is bullish and will continue to be so over the medium to long term. For those who are patient, there will be some great opportunities to buy in the not too distant future.

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 Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au