Summer has ended and so has the reporting season. Which is more important for a portfolio review? The changing of the seasons from summer to autumn is certainly a nice concept. The beginning and end of a New Year certainly tallies with New Year's resolutions.
However, in my opinion, the most relevant times for your portfolio review are February and August. These are the profit reporting season months. Results that outpace market consensus forecasts, typically leads to a re-rating of those share prices to higher levels.
Soon after releasing results above market consensus forecasts, I used this investment rationale to recommended REA Group Limited (ASX: REA), Boral Limited (ASX: BLD), Computershare Limited (ASX: CPU) and JB Hi-Fi Limited (ASX: JBH). Over the period from the day prior to the profit releases to 7 March, 2014, the share prices have risen 23%, 17.8%, 13.2% and 12.4% respectively. However, as we all are aiming to be medium-to-long-term investors, let's overlook these spectacular gains in less than one month.
Just as one swallow doesn't make a summer, you may be thinking that one result exceeding market consensus forecasts is an insufficient basis upon which to make an investment decision. However, the same stocks exceeded market consensus forecasts in the prior August 2013 reporting season. So, although in some cases you may have missed the initial share price rise, quality companies generally continue to deliver and there is ample time to still invest.
Here are the reasons for the share price rises to date.
REA Group Limited (ASX: REA)
The REA Group results confirmed it is one of the market's premier growth companies. This led to multiple lifting of price targets and upgrading of earnings forecasts. An improving real estate market provided impetus for REA Group's jewel in the crown website, realestate.com.au, which is 61% owned by News Corp (ASX: NWS). The international expansion opportunities for its other websites are also a significant driver going forward.
Boral Limited (ASX: BLD)
Building materials company Boral showed improvements in every sector in the first half with cement, building products and the U.S. business ahead of expectations. While the share price was already on the rise, due to positive momentum for housing-related stocks, the combination of cost cutting and cash generation has lent ongoing support.
Computershare Limited (ASX: CPU)
Registry and investor services firm Computershare has been a consistent performer with earnings per share growing 140% over the last eight years. It exceeded market forecasts by controlling costs, reducing debt and generating good cash flows. A rise in interest rates or an increase in mergers and acquisitions would complete a very good story.
JB Hi-Fi Limited (ASX: JBH)
Market commentary was broadly positive, with some analysts seeing electronics retailer JB Hi-Fi as the preferred company for exposure to the Australian cyclical upswing. Despite sales results being pre-released, a rise in the full year profit guidance by 8% to between $126- $129 million was a positive surprise. Other highlights were a stable industry outlook, rational discounting and ongoing store openings.
Foolish takeaway
In my opinion, all four of these stocks would sit comfortably in a long-term portfolio. The above results clearly show that a cycle of favourable upgrades and announcements is in play for these quality stocks. This can lead to consensus forecasts being exceeded on an ongoing basis.
For the first article in this series, click here.
