As all experienced investors will tell you, there is no more important time to be across your portfolio than during a reporting season. It is when we witness the fruits of a company’s labour and obtain an insight into what the future may hold.
It is a busy time. Generally companies are required to publish their financials twice a year, within two months of their financial year end date. That is June 30 for most, so we can expect August to be the month when the news – good or bad – is delivered.
At Lincoln, we are optimistic about the upcoming reporting season and the broader market for the coming financial year.
Economic and funding conditions remain accommodative and should not put stress on businesses. The global economy continues to power ahead.
The price of growth companies has stabilised following the sell-off in the latter part of last year. Although long-term bond rates have started to trend upwards, in our mind there is still a compelling case for income investing over the next 12 months.
With a number of stocks trading at high prices relative to their valuations, the market is trading on a price-to-earnings multiple slightly higher than the 10-year average. While many will point to mixed economic data reflecting an uncertain economy, we take heart that there are many great businesses to invest in. Many with global exposure are ready to reap the rewards of a rapidly improving global economic outlook.
One concern for us, however, is the current health of the market. With only 28.4 per cent of companies listed on the local market able to boast manageable levels of financial risk, it reminds investors of the minefield of investing in the Australian market, and why many global investors see us as “high risk”.
There was a slight improvement in the financial health of companies in the last reporting season. Hopefully this will happen again next month. However, with many listed companies either not generating profits or positive cash flow, or lumbered with high levels of debt, we are not hopeful of a significant improvement.
Reporting season is a time when investors need to manage their portfolios proactively.
1. Re-acquaint yourself with your investment strategy and objectives. You should (if you don’t already) have a strategic framework or investment plan which will allow you to make quick and informed decisions without emotion. The framework you employ should be aligned with your investment objective and the level of risk you are comfortable with.
2. Review every company in your portfolio against your framework. Make decisions as to whether you are comfortable holding your companies before they report. As the release of financials can lead to big price swings, if any stock that makes you feel uneasy, or worse, no longer meets your objectives or the fundamental grade, then sell the shares today.
3. Find out when the companies in which you own shares will report their profit and loss accounts. When they do, you will need to assess their numbers, their profits, dividends, financial health and company outlook. All these will have an impact on price, but more importantly will likely govern your next move.
Of all the steps above, none can be completed without having a strategic and disciplined framework for making investment decisions. Not having a framework to help you tactically prepare for what is coming will expose you to risks.