UBS picks the best and worst ASX stocks from the reporting season

UBS picks the best and the worst ASX stocks on the S&P/ASX 200 Index (Index:^AXJO) coming out of the profit reporting season.

Brendon Lau

Brendon’s passion for shares started by accident in 2003 and he has worked in various roles around capital markets ever since as a trader, stock analyst and markets reporter with the Australian Financial Review. Most of his wealth has come from share investing than any other asset class, and that has given him the financial freedom not to work full-time, if he chooses to. Brendon is a medium to long-term investor who aims to hold positions for a year or longer and is focused on fundamental analysis, although he will occasionally use technical indicators to time his entries and exits. Brendon has an MBA from Melbourne Business School and is RG 146 certified. He lives in Melbourne with his wife, three kids and two dogs.

Published September 2, 2020 12:47 pm AEST

Last month's reporting season produced more winners than losers despite the COVID-19 market meltdown. UBS picks the best and the worst of the S&P/ASX 200 Index (Index:^AXJO) bunch.

The broker noted that the profit season was better than expected with several stocks showing surprising resilience to the economic fallout from COVID-19.

One sector that stood out for all the right reasons was consumer discretionary. Many listed players in this space have a decent web presence that appealed to stuck-at-home consumers.

Other sectors that performed well include consumer staples, building materials, gaming, general industrials and insurance, added UBS.

2 street signs with winner and loser COVID recovery oil price — Image source: Getty Images

Biggest earnings cuts

Consensus estimates for FY21 earnings per share (EPS) were cut by 1.8% over reporting season. The biggest culprit was the industrials (excluding financials) stocks as the group suffered an 8.2% downgrade.

Financials also got a 2.6% haircut to the current financial year's EPS forecast, although most of the cuts were already made before reporting season.

On the other hand, resource stocks enjoyed a 6.3% uplift to FY21 EPS due largely to good commodity prices and outlook.

Profits to rebound in FY21

But the worst of the earnings hit could be behind us even though tomorrow's GDP reading will almost certainly confirm that we are in a deep recession.

"The market now expects 8.3% EPS growth in FY21, led by the Financials (+13.3%) and the Resources (+8.3%)," said UBS.

"The Industrials ex-Financials are now only seen delivering 2.3% EPS growth, down from 8.3% before reporting season."

Cash surprise

But one of the biggest surprises from the reporting season isn't earnings but cash flow. The broker noted that 20% of stocks under its coverage delivered stronger than expected cash flows.

This may be due to management teams running down inventories and hoarding cash due to the uncertain operating environment.

Biggest ASX winners from reporting season

ASX 200 stocks that are regarded as being the champs of the reporting season in UBS' eyes include the Cleanaway Waste Management Ltd (ASX: CWY) share price, and the JB Hi-Fi Limited (ASX: JBH) share price.

Others in the winners' circle are the Reliance Worldwide Corporation Ltd (ASX: RWC) share price, Suncorp Group Ltd (ASX: SUN) share price and Treasury Wine Estates Ltd (ASX: TWE) share price, although the latter was subsequently hit by the China-Australia trade spat.

On the flipside, the biggest sinners include the Bendigo and Adelaide Bank Ltd (ASX: BEN) share price, Origin Energy Ltd (ASX: ORG) share price, Telstra Corporation Ltd (ASX: TLS) share price, RESMED/IDR UNRESTR (ASX: RMD) share price and Vicinity Centres (ASX: VCX) share price.

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