If you've been paying attention during the earnings season results these past few weeks, you'll likely have noticed that some S&P/ASX 200 Index (ASX: XJO) stocks got walloped despite posting strong results while others surged on weak reports.
"Over the February reporting season, it was not the companies that delivered quality results that have proven most interesting, but companies that were languishing due to a combination of factors such as cyclical weakness, interest rate pressures or specific stock overhangs," Jun Bei Liu, founder and lead portfolio manager at Ten Cap, said (courtesy of The Australian Financial Review).
Liu pointed to JB Hi-Fi Ltd (ASX: JBH) and Pinnacle Investment Management Group Ltd (ASX: PNI) as two companies that got sold off despite posting "outstanding" earnings results.
As for those ASX 200 stocks that investors rewarded despite weak results, she noted, "Meanwhile, companies reporting weaker results have seen sharp price gains."
Companies like fast food pizza retailer Domino's Pizza Enterprises Ltd (ASX: DMP) and media networking solutions provider Audinate Group Ltd (ASX: AD8).
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Two ASX 200 stocks that rocketed on shaky results
On 7 February, Domino's released a trading update ahead of its official half-year results announcement, which was reported on 25 February.
Domino's shares surged on the day, despite the trading update revealing that first-half sales were down 2.9% year on year, with same-store sales were down 0.6%. In a move to slash costs, the company also said it plans to shutter 172 stores in Japan.
Commenting on the market's reaction to the news, Liu said:
Domino's Pizza Enterprises announced significant store closures, rising debt, and ongoing trading challenges. It continues to struggle with franchisee profitability, an essential element for organic growth.
Despite this, its share price jumped 20% on the day, seemingly on relief that the numbers weren't worse and that it would be a beneficiary of improving macro conditions.
Turning to Audinate Group, the ASX 200 stock reported its decidedly underwhelming half-year results on 17 February. A day that saw the Audinate share price surge 26.5% by market close.
Liu said the market response to Audinate's results was "a real head-scratcher".
"The company reported a year-on-year sales decline of over 50%, downgraded guidance, and continues to burn millions in cash," she said.
Liu added:
Analysts barely expect it to break even in the next 12 months, yet it still trades at a revenue multiple above nine times earnings – comparable to high-quality businesses such as Fisher & Paykel Healthcare Corp Ltd (ASX: FPH).
So, why are investors rewarding these ASX 200 tech stocks following such weak results?
According to Liu:
We are simply seeing the first signs that stocks previously off limits are now back in favour as confidence in an economic recovery, however shallow, and falling interest rates, however moderate, becomes the focal point.
