Earnings season can be an exciting period for investors, but it can also be downright scary – especially with so many stocks trading on such high premiums. As has been shown so far this August, companies with results that come in above consensus can be rewarded handsomely, but those that drift below expectations tend to be punished in extreme ways.
As a perfect example, shares of Cochlear Limited (ASX: COH) and G8 Education Ltd (ASX: GEM) both soared after positive news was released from their corners. Cochlear rose 10.3% after it reported a strong rebound in sales and regulatory approvals, while G8 Education extended its incredible run as it reported a 48% increase in net profit for its first-half operations.
In contrast, shares in companies like Ozforex Group Ltd (ASX: OFX), JB Hi-Fi Limited (ASX: JBH) and REA Group Limited (ASX: REA) were slammed following trading updates or disappointing earnings reports. Funnily enough, REA Group actually dropped 8.6% the day it reported its earnings, despite announcing a massive 37% rise in net profit.
Given that the stock was trading on a price-earnings multiple in excess of 40 times forecast earnings, it's perhaps no surprise investors were disappointed it didn't 'over-deliver'.
The same could also be said for Commonwealth Bank of Australia (ASX: CBA) which announced a record cash profit of $8.68 billion yesterday as well as a greater full-year dividend than had been expected. Its shares tumbled 0.9% for the day, dragging the rest of the market and investor confidence down with it.
Investors need to understand that these price swings were to be expected in a market like this. The S&P/ASX 200 Index (INDEXASX: XJO) has soared over the last year, in part due to the low interest rate environment, and a large number of shares are trading at all-time highs – some perhaps unjustifiably so.
As such, there is an enormous expectation on management teams to outperform and continue improving. And when an expensive stock doesn't quite perform to standards, some investors tend to head straight for the exits.
A compelling growth stock to buy today
Unfortunately, as the market has soared higher, more and more stocks have become wildly overpriced. As such, it has become increasingly difficult to identify compelling buy opportunities. However, there are still a number of stocks which are still looking very attractive for long-term focused investors, provided you know where to look…
