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How you can profit from the reporting season

The August reporting season is about to officially kick-off tomorrow and this presents an opportunity for the attentive investor to generate extra returns.

It doesn’t matter that the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) is looking somewhat stretched as the index hovers around its highest level in over a decade either.

History has shown that stocks tend to behave fairly consistently at reporting season, noted the analysts at Macquarie Group Ltd (ASX: MQG).

There are two key things investors should keep in mind during reporting season. The first is that the share prices of companies that report positive earnings surprises tend to keep climbing for several weeks.

“Should one fail to predict an earnings surprises [sic], there is still plenty of opportunity to profit post the event,” said Macquarie.

“Companies that experienced a positive surprise tend to continue drifting upwards for another 60 days post the announcement. This effect is stronger for companies with a strong earnings revisions profile.”

The second thing to remember is that the opposite isn’t quite true for the disappointers. The share price of a company that fails to meet market expectations will undoubtedly fall, but the bad news is almost immediately priced into the stock.

“In other words, if you miss identifying a stock that has a positive surprise, you can chase it, but if it has a negative surprise, this tends to be discounted almost instantly and would imply that it’s more important to be in front of losers than winners!” added the investment bank.

Macquarie has also identified a number of stocks that it thinks are most at risk of disappointing the market. Some of these include telco Telstra Corporation Ltd (ASX: TLS), hospital operator Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC), our largest mortgage lender Commonwealth Bank of Australia (ASX: CBA) and power retailer AGL Energy Ltd (ASX: AGL).

On the flip side, Macquarie believes that the stocks that could deliver better than expected results include our national carrier Qantas Airways Limited (ASX: QAN), jewellery retailer Lovisa Holdings Ltd (ASX: LOV), dairy products company A2 Milk Company Ltd (ASX: A2M) and wealth manager Perpetual Limited (ASX: PPT).

Another interesting observation from the investment bank is that the number of companies producing positive and negative results is usually the same no matter what part of the market cycle we are in.

Roughly half will meet expectations with a little over a quarter beating consensus and the remainder missing the target.

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Motley Fool contributor Brendon Lau owns shares of AGL Energy Limited, Macquarie Group Limited, and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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