The upcoming reporting season promises to be like no other. The COVID-19 pandemic will make this August profit results an even more unnerving time for ASX investors.
The prospects for shocking negative surprises are heightened this year as the ASX relaxed the rules around disclosure due to the coronavirus outbreak.
The move is well intended. The shutdowns to control the virus have cast a thick fog of war around the near-term outlook for many ASX companies.
Why this reporting season is different
But the unintended consequence is that it is now harder than ever for investors to tell which ASX stocks will disappoint as we head into reporting season.
More significantly, this makes the investing strategy for the August results season different from recent years. This time, the key to outperforming is more about avoiding earnings disasters than it is about picking ASX shares that can exceed market expectations.
In fact, just meeting consensus forecasts may be enough to keep a company’s share price ahead of the S&P/ASX 200 Index (Index:^AXJO).
One standout ASX sector for August
While there are precious few safe harbours on the market when the reporting season kicks off in a little more than a month, a handful of ASX stocks that are well placed to weather what is likely to be a stormy profit season.
Some believe the iron ore price is set to tumble when shipments of the commodity from Brazilian rival Vale SA recovers. That is true, but I think one shouldn’t overestimate the miner’s ability to ramp up output when the country’s COVID-19 rates are the second highest in the world.
Coupled with Brazil’s weak healthcare infrastructure, and you can see why I am not optimistic that the Latin American country can get on top of the coronavirus curve anytime soon.
Potential profit upgrade
What’s more, the iron ore spot price doesn’t need to rise anymore for the three stocks to be cheap. If the price of the steel making ingredient holds around current levels, the three ASX miners’ earnings before interest, tax, depreciation and amortisation (EBITDA) will need to be upgraded significantly.
Macquarie Group Ltd (ASX: MQG) estimates FMG’s EBITDA will increase by 67% in FY21, while Rio Tinto’s and BHP’s EBITDA will have to rise by 23% and 12%, respectively that year.
What gives me extra comfort is that their balance sheets are among the strongest on the market. There’s little risk they will need to do an emergency capital raise like so many others on the ASX.
Gold standard for the August reporting season
Stocks in this sector have run hard this calendar year and some think are looking expensive. But I think the price of the precious metal is likely to break above previous record highs due to excessive global stimulus and record low interest rates that will persist for years.
Having said that, it’s a good idea to buy a few gold stocks as some miners may unexpectedly encounter production issues. The same goes for iron ore miners for that matter.
ASX stocks with promising outlooks
There are also a number of industrial stocks that I believe will hold up well in August. The Ansell Limited (ASX: ANN) share price is one thanks to strong global demand for personal protective equipment.
I also have high hopes for the Seven Group Holdings Ltd (ASX: SVW) share price. The conglomerate, which owns the country’s largest industrial equipment rental company, is a big beneficiary of the infrastructure construction boom. State and federal governments have promised to fast-track a number of key projects to stimulate the economic recovery.
Other possible ASX winners from the reporting season
Our home-grown investment bank Macquarie should be another that delivers the goods. Management’s long track record of under promising and over delivering is reassuring. The group has also been growing its recurring revenue business, while volatile markets should present opportunities for its traders.
While the experts are still debating if we are experiencing the second wave of COVID-19 infections, the second wave of panic buying is already hitting the supermarkets (no thanks to Victoria!).
The only thing that I am worried about with Woolies is Big W. If there is a negative surprise from its results, it is more likely than not to come from its struggling department store.
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Motley Fool contributor Brendon Lau owns shares of Ansell Ltd., BHP Billiton Limited, Macquarie Group Limited, Rio Tinto Ltd., Seven Group Holdings Limited, and Woolworths Limited. Connect with me on Twitter @brenlau.
The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool Australia has recommended Ansell Ltd. 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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