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Well, as of last Friday, we're halfway through what is colloquially known as 'earnings season'.
You probably know this, but companies that are listed on the ASX are required to lodge their accounts within two months of the end of their half- and full-year accounting periods.
What you may not know is that companies aren't obliged to use the tax- or calendar years – they can pick whatever date they like. They just have to lodge their accounts within two months of that date.
In the event, the vast majority of companies use June 30 and December 31. Most run traditional financial years – July 1 to June 30. Some use calendar years: January 1 to December 31. Either way, their half-year or full-year results are due by the end of February.
And given it usually takes them a month or so to put all of the data (and annoyingly self-promotional 'investor presentations') together, we don't tend to see them start publishing until this month.
And so, February (and August) become 'earnings season' – when almost all ASX companies give us that biannual look under the proverbial bonnet (no, not 'hood', thank you… and get off my lawn!)
And as of Friday, we're halfway through the month. So, what have we learned?
Firstly, investors really, really hate surprises. Like, really.
There have been quite a few large falls of 20% or more when companies released results that weren't in accordance with investor expectations.
Sometimes, that's justified. Other times? Well, short-termism can be the enemy of long-term success. If your investment thesis relies on one six month period being 'just so', then you're playing with fire.
On the other hand, if you are looking at a company's long-term growth prospects, half a lap around the sun is far less consequential.
We're definitely in the latter camp at The Motley Fool. Half-year results can absolutely be milestones, so we don't disregard them, but our focus is clearly on the question: "What does this result say about the 5 and 10 year prospects".
Sometimes, it says a lot. Good or bad. Sequential profit increases from quality companies are lovely. Unexpected losses can be a warning. But sometimes it's the opposite! That's why you have to look at the detail for yourself, rather than using share price movements to try to guess.
The best bit? If other investors overreact to temporary problems, but we think the long-term story is intact, we sometimes get the chance to take advantage of their pessimism and buy at cheap prices!
Second, growth comes from a multitude of places, and knowing which is which is vital when assessing a company's long term prospects.
Compare Commonwealth Bank of Australia (ASX: CBA) and ANZ Group Holdings Ltd (ASX: ANZ), for example.
CommBank managed to grow profits by 6% by growing its lending and deposit bases, even as margins shrank a little.
ANZ's year-on-year profit growth was the same, but it achieved that result largely by cutting costs.
Which result is better?
In the short term, money spends the same, no matter its source.
In the longer term, you 'can't cut your way to greatness' as the old saw holds.
On this result alone, Commonwealth Bank shareholders should be happier than ANZ's, because the former is on a significantly stronger growth path, which may bode well for the future.
That's not to say ANZ can't find growth from here. Or that the cost-cutting wasn't justified. Just that compound returns tend to be better when a business can deliver on something I tend to look for: 'being more relevant, to more customers, more often'.
Lastly, a perennial one: earnings season really should be called 'expectations season'.
Because share prices don't react to the actual results, but rather how those results compare to the market's 'expectations'.
Take a couple of energy companies: AGL Ltd (ASX: AGL) and Origin Energy Ltd (ASX: ORG). Both companies' profits fell, compared to last year. And the share prices… rose.
Now a couple of retailers, Temple & Webster Ltd (ASX: TPW) and Nick Scali Ltd (ASX: NCK). Both grew revenue strongly. Temple & Webster's profit fell, while Nick Scali's rose. And both companies' share prices… crashed.
Why?
In all four cases because the market expected something different to what the companies delivered.
By the way, don't be sucked into thinking about companies on the basis of their share prices. Sometimes, the movement in the share price tracks the business performance. But less often, in the short term, than you might think.
Too often, you hear 'Oh, XYZ is a great stock'. What those people mean is 'the share price has been going up lately'.
Or, 'ABC is a terrible stock' when they mean the price has been falling.
It's true that the investor returns have been good, and bad, respectively, in each case.
But they're talking about a really abstract issue, here, often without knowing it.
They're not really talking about the company at all – just its share price…
They're comparing two arbitrary points in time…
And they're comparing an average market expectation at those points.
Here's why. Consider a company whose shares fell from $100 per share to $10. That's unquestionably bad for those who paid $100 a share to buy it.
It's had a bad year. But does that make it a 'bad stock'? Only over that timeframe.
Now let's say the shares go from $10 back to $100 and then to $200.
Is it now a 'good stock'? Most would say yes.
But in both cases, all we're really saying is that the crowd loved, then hated, then loved the company again.
Maybe justifiably, based on the company's performance.
Or maybe not.
And here's the thing: it's all in the past anyway.
The only thing that matters is the future. Who cares if it is considered a 'good stock' or a 'bad stock' based on past activity (and past investor sentiment).
Investors hate tech companies at the moment. They loved them a year ago.
We've seen this movie before. The dot.com boom and crash, anyone? Or less remarked upon, the post-COVID tech boom and subsequent fall.
Banks are having a moment in the sun, after going nowhere for a few years, post-COVID.
Looking backward would have been somewhere between useless and expensive, if you'd used only past history to work out when to buy and sell.
So, as you look at the results of the past two weeks, and prepare for the next fortnight, here's a quick list to keep in mind:
Ignore:
– 'Great stocks' and 'bad stocks'
– Sentiment-driven share price moves
– Past share price performance
– Promotional company announcements that seek to selectively direct your attention
Focus on:
– The underlying earnings power of a business
– What the result tells you, if anything, about the long-term future
– The candour of management
– Whether today's price (not last year's price change) is attractive, based on the above
No, it's not always easy to ignore the people yelling 'the sky is falling', or a soaring share price.
But that's exactly what we have to do.
Your returns don't come from 'what just happened', but from 'what happens next'.
Invest accordingly.
Fool on!
