One well known fund manager recently said that he thought the stock market was presently 15% above fair value. He also pondered if everyone, including broking analysts, had revise down their earnings expectations for financial year (FY) 2014 to realistic levels.
With the reporting season only a couple of weeks away now, the issue of realistic expectations is an important issue for investors to consider. Are you currently buying stock in companies and expecting them to provide positive earnings commentary for the next 12 months? Are there stocks in your portfolio that might be likely to disappoint the market when they provide an earnings outlook during the upcoming reporting season?
The diagram below shows how earnings per share expectations have declined over the past 18 months for both FY13 and FY14. The second chart on the bottom line shows how expectations for Australia have been reset. One observation from the charts is how the leveling off in Australia's earnings outlook which is at odds with the rest of the world (Hong Kong and Japan are the exceptions) which continue to be firmly in a downward trend. Considering stock markets have put in stellar performances, both in Australia and overseas too, it is perplexing to consider what is driving the markets higher if earnings expectations keep going lower.
With so many companies looking fully valued and growth looking a tough ask for many businesses now may be a good time to aim to have some cash available, or in other words 'keep some powder dry', as they say. The potential for downbeat assessments from companies about their expectations for the FY14 year could lead to many stocks selling at cheaper rates in the next few months than they are today.
Foolish takeaway
While I'm not suggesting that the following companies are likely to disappoint, one need only look at a chart of their share prices over the past 12 months to be reminded that it wasn't long ago that these firms could have been purchased at significantly cheaper prices. Woolworths (ASX: WOW) was 25% cheaper this time last year, Computershare (ASX: CPU) was 41% cheaper and Telstra (ASX: TLS) was 27% cheaper.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
