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Earnings reports and stocks to avoid

Earnings season provides investors with information based on recent performance, as well as an insight of how the reporting company expects to perform in the future. However, it can also leave many investors confused as to where their money would be best served, and which companies should be avoided due to their prospects or outlook.

Whilst we have seen some fantastic results, we have seen others that were lackluster whereby companies failed to meet earnings expectations or announced that they expected a difficult six months ahead. However, it is performance over the long-term that investors should be focused on, regardless of the short-term result.

For instance, Commonwealth Bank (ASX: CBA) returned the largest full-year profit that any Australian bank has ever recognised. Low interest rates and its focus on customer service were amongst the reasons behind its return of $7.8 billion. This is a strong company, and one that is likely to be around for a very long time, however, is that a good enough reason to invest?

According to IG Markets analyst Evan Lucas, the bank’s shares are “priced to perfection”. Their strong run over the last 12 months already reflects their dominance in the market. Meanwhile, many analysts have suggested that the result will be very difficult to follow up next year, implying that the chances of Commonwealth shares outperforming the market over the long run are quite poor.

BHP Billiton (ASX: BHP) also reported earlier this week, and failed to meet analysts’ expectations of a 26% profit fall with the miner instead announcing a fall of 31.1% in profit excluding one-off items. The company’s outlook on commodity prices in coming years also failed to impress investors, who sold the shares down over 2%.

As one of Australia’s largest companies – and trading at a hefty discount compared to just two years ago – many investors would recognise this as an opportunity to buy. Despite the drop in share price however, BHP would be a risky investment given the volatility of the mining sector and its outlook for coming years.

So where should investors look?

Although BHP and Commonwealth are both enormous companies, it seems that their growth stories are behind them. Instead, investors should be looking at strong companies that are reasonably priced and that they believe will perform well over the long term.

For instance, two of Australia’s most promising small companies are still flying under the radar. Discover these two exciting ASX investments in our brand-new special FREE report, “2 Small Cap Superstars”. Click here now, it’s free!

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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