Next month's reporting season will be an inflection point for the S&P/ASX 200 Index (Index:^AXJO) and those looking for tips on how to best position for this event should read on.
For the first time since the COVID-19 outbreak, investors will get a chance to look under the hood of ASX shares.
The profit season will help determine the direction the market takes as the top 200 index remain stuck in a trading range.
ASX stock guidance will be rare
But if you are hoping for more clarity over the earnings outlook for the market, you might be disappointed. The ever-changing impact of the coronavirus pandemic will leave many ASX companies reluctant to stick their necks out.
In fact, the analysts at Macquarie Group Ltd (ASX: MQG) are only expecting half the normal number of ASX stocks to give guidance in August. Those that do might only quantify their outlook for specific variables and segments instead of for the whole business.
"We count 80% of the ASX 100 as providing forward looking comments before Covid19," said the broker.
"During the peak of the pandemic, 38% of the ASX 100 withdrew their guidance, while another 18% reduced guidance."
Guidance givers set to outperform
Here's an interesting fact. Stocks that provided guidance outperformed those that didn't through the COVID-19 bear market. This is true even for ASX stocks that cut their guidance during the pandemic.
"The worst performing stocks since the [February] high have been those that withdrew guidance, followed by those that do not issue guidance," said Macquarie.
"In both cases, investors are faced with higher earnings uncertainty, which may lead to a discounted valuation."
ASX stocks to target during the reporting season
So, what this suggests for the upcoming reporting season is that stocks that provide guidance will likely outperform those that don't – even if they downgrade their forecasts later.
The other takeaway for investors is to not fret about poor earnings reports as a big fall is already anticipated by the market.
Macquarie also believes that investors will be in a forgiving sort of mood given the unprecedented crisis that we are going through.
This provides an opportunity for ASX companies to get all the bad news out of the way and rebase market expectations for the year ahead.
If they are successful in doing so, FY21 could prove to be a good year for ASX investors.
ASX stocks to buy
The stocks that Macquarie deems to be the best buy ideas for the reporting season include the Fortescue Metals Group Limited (ASX: FMG) share price, Goodman Group (ASX: GMG) share price and the Charter Hall Group (ASX: CHC) share price.
Also making the cut are the Coles Group Ltd (ASX: COL) share price, AMCOR PLC/IDR UNRESTR (ASX: AMC) share price, Appen Ltd (ASX: APX) share price and Baby Bunting Group Ltd (ASX: BBN) share price.
