A long-term share market investor needs many attributes to be successful. These include preparation, avoiding torpedoes and the nerve to buy when others are selling.
The three attributes are all linked. Good preparation leads to an understanding of key drivers of the stock price. In the share market, luck is what happens when preparation meets opportunity. Preparation not only avoids purchasing stocks that act as torpedoes for your portfolio but also lends confidence when investing in a falling stock.
During the February reporting season I recommended 15 stocks that released results above consensus market forecasts. The short-term share price performances for 12 of those stocks were spectacular.
By looking back at the prior reporting season, those same stocks also exceeded expectations and outperformed over the ensuing months. This encouraged me to suggest, that despite missing the initial share price jump, there was still ample time to invest. Additionally, these quality stocks tend to enter a virtuous circle of ongoing upgrades and positive news announcements. This makes them suitable for medium-to-long-term investors.
The market is sometimes inefficient in factoring new information into share prices. Some of the 12 outperformers included Seek Limited (ASX: SEK), Carsales.com Limited (ASX: CRZ) and REA Group Limited (ASX: REA). They are rightly attracting the most attention — from the day prior to the profit releases to 7 March, 2014, the share prices have risen 36.9%, 28.3% and 23% respectively.
As a result, other less exciting stocks that also exceeded consensus market expectations have, in some cases, been placed in the shade and subsequently underperformed. Far from being disheartened with my three underperformers, I would now recommend them even more strongly.
Here are several reasons to buy two of the following stocks today and place the other on your watch list for the coming days.
1. Flexigroup (ASX: FXL)
For the second consecutive half yearly profit release, Flexigroup exceeded consensus market forecasts. The company is building a legacy of outperformance by extending its run of double-digit earnings-per-share growth to five years. A significant uplift in interest-free cards was a major positive.
Flexigroup is a diversified financial services group that operates in Australia, New Zealand and Ireland within a diverse range of industries including electrical appliances, solar energy, home improvement, fitness and point of sale systems.
2. Hills Holdings (ASX: HIL)
This is primarily a successful restructuring story. A number of manufacturing businesses have been sold off and as a result big write-downs are now in the past. So despite a 20% reduction in revenue, this service-based company in the health-care sector was able to increase earnings before interest and tax by 56%.
The underlying business has now improved over two consecutive half years and ongoing outperformance should be driven by an ungeared balance sheet. This may lead to either capital management initiatives or further acquisitive growth. Margins are also predicted to improve as the company transitions towards a solutions provider in technological and communication market segments.
3. Rio Tinto Ltd (ASX: RIO)
Rio Tinto is considered one of the world's largest diversified miners. Higher iron ore shipments and cost reductions assisted the company in beating consensus earnings forecasts by 6%. The full-year result included improving cash flows, reduced capital expenditure and a lower net debt position.
On valuation grounds the company is entering buying territory and the prospect of some capital management initiatives during FY2015 lends additional support. The 15% jump in dividend for the period represented a payout ratio of 35%, the highest since 2005.
Obviously, for a company that derives 90% of earnings before interest and tax from the iron ore division, current gyrations in the iron ore price are a concern. I would keep a watch on developments and then invest for the long-term.
Foolish takeaway
In my opinion, all three of these stocks would sit comfortably in a medium-to-long-term portfolio.
I have listed them in my order of preference and suggest placing Rio Tinto on your watch list before summoning that required nerve to buy while others are selling.
