Those looking for hints on how to beat the market this August profit reporting season may be keen to hear what Macquarie Group Ltd (ASX: MQG) has to say.
There's a good amount of optimism streaming into the market ahead of next month's profit health check with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index flirting with multi-year highs even as the outlook for global economic growth dims.
Things could get ugly for stocks that don't meet market expectations, while the opposite is also true for those that can "beat the street" – meaning reporting revenue and earnings that's ahead of consensus expectations.
"The over 20% rise in Australian stocks since the December low is driven by PE expansion," said Macquarie.
"It is normal for valuations to rise ahead of earnings (which lag the cycle), but there needs to be an EPS follow through for equities to rise sustainably."
ASX sectors that are most and least exposed
The sector that is most at earnings risk is industrials, according to the broker. The good news is that a poor reporting season for the group may not be enough to derail the broader market rally given the low earnings expectations for this group and the interest rate cutting stance adopted by central banks around the world.
On the flipside, there are high expectations for resources thanks to stubbornly high commodity prices, such as iron ore.
"Our team are looking for close to 30% EPSg [earnings per share growth] from resources in FY19E," said the broker.
"This is up from a forecast of +5% in May 2018, and a large part of the rise is due to higher iron ore prices. The growth is expected to continue in FY20E, with forecast EPSg of over 20%."
Picking the reporting season winners and losers
To uncover what to buy and what to bail, Macquarie looked at stocks where its analysts are above consensus forecast while earnings estimates are rising and vice versa (where its estimates are below consensus and where consensus forecasts are falling).
Using this filter, the reporting season heroes to buy include iron ore producer Fortescue Metals Group Limited (ASX: FMG), property group Charter Hall Group (ASX: CHC) and oil & gas engineering group Worleyparsons Limited (ASX: WOR).
Another potential winner in August is milk products supplier A2 Milk Company Ltd (ASX: A2M). While Macquarie's forecasts are in-line with consensus, the broker noted its high net earnings revisions ratio of +42%, which is high within its peer group.
On the flipside, stocks that investors should dump ahead of the reporting season include diversified miner South32 Ltd (ASX: S32), our biggest mortgage lender Commonwealth Bank of Australia (ASX: CBA) and hearing implant maker Cochlear Limited (ASX: COH).
If you are looking for other stocks that can outperform through FY20, the experts at the Motley Fool have some ideas for you.
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