The August profit reporting season is described by some as the worst ever for the ASX, but this may not be true for at least one sector.
This sector is the only one that UBS is predicting can deliver earnings per share (EPS) growth for FY20.
If you guess mining, you'd be wrong. While Rio Tinto Limited (ASX: RIO) posted a decent result last week, its interim EPS fell 3%!
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The only ASX sector growing profits
The mining-beating sector is discretionary retail even though this sounds counter intuitive. Retailers tend to be among the hardest hit in recessionary environments, just like during the GFC.
But this downturn that's triggered by COVID-19 is different from any other we've encountered in living memory.
The pandemic brought about a change in consumer behaviour, while government stimulus provided an extra tailwind. UBS is tipping the sector will post a 5.9% increase in EPS for the year.
Recent guidance shines light
The recent trading updates from JB Hi-Fi Limited (ASX: JBH) and Kogan.com Ltd (ASX: KGN) are only but two examples of retailers growing sales and earnings.
However, this doesn't mean the best opportunities are in the consumer discretionary sector. If anything, the fiscal cliff (when government support is tapered or withdrawn in October) poses a risk to the sector.
While many retailers will post decent FY20 profit results, their outlook for the next 12 months may not support their stellar share price run, in my view.
ASX stocks that can beat expectations
If you are looking for upside surprises during the reporting season, you probably will need to look elsewhere, and UBS highlighted a few to watch.
Among the S&P/ASX 200 Index (Index:^AXJO) miners, the BHP Group Ltd (ASX:BHP) share price, Alumina Limited (ASX: AWC) and South32 Ltd (ASX: S32) share price could jump as UBS thinks they could deliver better than expected results.
Others in the top 200 benchmark that the broker believes can beat expectations this month include the AMCOR PLC/IDR UNRESTR (ASX: AMC) share price and RESMED/IDR UNRESTR (ASX: RMD) share price.
Better than expected outlook
Meanwhile, the larger cap stocks that could please investors with their outlooks are Amcor, Goodman Group (ASX: GMG) and Charter Hall Group (ASX: CHC).
At the smaller end of the market, UBS is optimistic about the Breville Group Ltd (ASX: BRG) share price and Nextdc Ltd (ASX: NXT) share price. The broker believes both will please on their results and outlook statements.
