The impending reporting season, just like any, is one filled with optimism for the proactive investor looking to buy stocks and capitalise on impressive results, supported by strong prospects. However, the anticipation can overwhelm many, as the potential for a short-term ‘pop’ in price can prompt trigger happy growth investors into buying stocks before they report, to make a quick buck.
Experienced investors will tell you that reporting season is also a time of trepidation as our portfolios may experience heightened volatility. This can be because a company delivers a solid result, but may ‘miss’ lofty expectations or, simply fails to meet the fundamental grade leaving investors to shoot first and ask questions later. While the outcome of any downward price move may be an over-reaction, the losses experienced will be real and can cause investors significant stress.
The timing of a stock purchase in and around reporting season can often be tricky for growth focused investors. Particularly in scenarios where share prices have experienced a rapid run up and may be trading near or close to all-time highs. The confusion can be further compounded by a price trading on historically high P/Es (price to earnings ratio) and/or well above the company’s valuation.
We suggest several options to our Stock Doctor members when preparing to buy stocks for inclusion in their portfolio weeks, if not days, prior to reporting. The right answer will depend on what suits the investor, the level of knowledge they have about the company and the current composition of their portfolio.
Option 1: Wait for the company to report.
Provides added comfort when purchasing or selling shares that are trading at a premium or discount to valuation. The company’s earnings will likely be revised in coming days. However, investment decisions regarding a stock’s appropriateness to your objectives and risk tolerance must be made quickly to avoid regret should price continue to climb or fall in the subsequent months. For example, we added Wisetech Global (WTC) and Appen (APX) to our Star Stock portfolios 12 months ago. Their subsequent returns have been exceptional, with early investors reaping most of the benefits.
Option 2: Wait for a positive company announcement before investing.
Positive announcements, such as trading or sales updates, can help support the view that the business is performing according to expectations. This will limit your risk should you decide to invest prior to the formal release of their financials. Updates are one way of preparing the market for what is to come. This may give you added confidence to go early, in anticipation of a strong result.
Option 3: If you have a naturally diversified portfolio take an exposure today.
If the stock is going to be one of 20+ in your portfolio, then you may consider acquiring the company early, so long as you have done your research and have strong conviction in the business. Any relative impact of a price decline in a single stock insulates you somewhat should you make the wrong call. It may however, still be prudent to implement a stop loss level to protect your capital.
With regards to income investors, the issue around timing your entry is simpler. Often you will have the opportunity to buy stocks in a company after it has reported (de-risking the potential for a share price drop) and before it goes ex-dividend. This provides a short-term boost to cash flow with the added comfort of having its fundamental qualities confirmed. Remember though, to be eligible for franking credits, investors need to hold the stock for 47 continuous days (including the ex-dividend date, as well as the buy and sell days).
While it is exciting to buy stocks at this time of year, it is important to consider selling those that no longer meet the fundamental grade. Poor performers can lead to significant losses if left unchecked, especially if their fundamentals deteriorate further. Stocks like Retail Food Group (RFG), which was a Star Stock 8 months ago, is a case in point. Had investors not proactively managed their portfolio and removed the business at $4.56, they would now be lamenting not only the poor performance, but also the missed opportunities of investing in those stocks that have performed exceptionally well.