As we move into February (seriously, where did January go?), one of the “highlights” of the investment calendar approaches rapidly. I’m talking about reporting season – a roughly 3 week period during which almost all listed companies provide an update on the last 6 months of trading and typically provide some forward looking statements to guide investors. Today, I wanted to let you all know how you can get the best bang for your buck in reporting season.
Option 1 : Skip it.
This is going to sound a bit ridiculous, given the wealth of information provided over the next three weeks. To be clear, I don’t think you should ignore the information being provided. But with most results updates being webcast nowadays, I would not recommend listening in to results calls.
Firstly, the information in these calls is typically short term in nature and provided to the investment community in order to inform their financial modelling. This is obviously crucial if your job involves short term financial modelling. As an individual investor, I would hope that precisely zero percent of your research involves trying to predict the exact state of the income statement, cash flow statement and balance sheet in six months time.
Secondly, and rightly or wrongly, the information in these calls has an information hurdle. If you are not used to listening to calls like this, the information will be confusing at best and misleading at worst.
If you choose to skip the circus that is the next three weeks, I would advise you to sit down at the end of February, assess the headline results of the companies you own and have on your watchlist, and make decisions methodically and without time pressure. Use the 5-20 hours of investor calls that you skipped to something more beneficial! Here are some suggestions – call your parents (if you are young) – call your children (if you are old) – go to the beach (age agnostic).
Option 2 : Participate, but have a plan.
In all likelihood, most people that read investment/dividend focused blogs are going to participate in reporting seasons in some shape or form. Here’s my suggestions if you simply can’t stay away.
Review your initial investment thesis before the result, and decide what numbers you believe are important.
- For example, I know a lot of investors focused on dividends simply don’t care about any financial metrics except the dividend payment. I don’t think this is a great idea, but it is an example of something that you may want to track.
- For me, I’m looking at dividends, operating cash flow trends and dividend coverage ratios. I also look at rolling 12 month sales trends.
- Importantly, for all of these numbers, I have a long term expectation as to how they should look if my initial investment thesis was correct.
- DO NOT DECIDE AFTER A RESULT WHICH NUMBERS ARE IMPORTANT. YOU WILL MAKE BAD DECISIONS.
Review the data provided by the company with respect to your long term thesis.
- If my initial investment thesis was that the company should be able to grow revenues at high single digits over the next ten years but they “only” grow at 6% this rolling 12 months, is that a problem? Unfortunately, in investing, the answer is typically it depends. Luckily for me, my focus on high quality companies and high quality income means that I can typically answer this question with a reasonable degree of confidence.
- For example, if a company that I hold grows at 5% rather than the 10% I thought was the case, it is typically pretty easy for me to determine whether it is a market issue or a company specific pricing issue. And if its transient, why would I care? After all, an average of high single digits isn’t going to me high single digits every year.
Do not expect straight line outcomes, and you should expect surprises.
- Sometimes, activities and outcomes take longer or shorter than expected. Here’s the analogy I like to use:
- Imagine you are doing your household budget for the next year. How close do you think you could get for all 12 months? Close? I’d certainly hope so – I’d imagine you are in the best position of anyone to know what your life will look like over the next 12 months.
- What if I told you that a study which asked people to do this typically saw variances of 20% plus? Think about all the surprises that occurred in your own life over the last 12 months – dentist, doctors, car troubles etc.
- The reality is, rarely ever does life move in a straight, easily predictable line. You shouldn’t expect a company (which is, after all, a lose aggregate of a number of people) to deliver the same.
Assess management statements through your investment thesis
- One thing that individual investors possibly tend to gloss over is the fact that the CEO and management team are trying to “sell” their company. Not in the sense that they are looking for a suitor, but rather that they are typically incentivised to increase their stock price
- Also consider that the CEO is typically not a long tenured position. A CEO puts his best foot forward in order to convince his stakeholders that he is performing optimally in his own role.
- You should view these presentations as performance art, and judge the comments and guidance statement within that lense. Management and the CEO will not lie to you – but they will absolutely put their best foot forward.
Take note of what areas management focus on as signposts to managements intentions
- If management spends a tonne of time talking about new growth initiatives when you believe their debt load is an issue, you should be somewhat concerned. Either management doesn’t understand the key value driver of their company (in this case a stretched balance sheet) or they are trying to avoid answering questions about it.
Think Long term:
- Reporting season can absolutely through up some excellent opportunities. This is mostly due to the fact that no one wants to walk into their bosses office and explain why they want to maintain a position in a stock that just had a massive downgrade.
- For long term investors, particular those focused on building high quality income streams, this can be an absolute boon. Low prices in high quality companies are, on average, opportunities, not risks.
- Remember, again, to assess the numbers released in reporting season from that long term viewpoint. We are looking at ten year holding periods here, minimum – but the vast majority of turnover following results comes from institutional investors who are under pressure to beat the index over the next 1, 3 and 6 months.
Last but not least
- Do your own research:
- Understanding the stocks you own and why is incredibly important to investment success. Piggybacking off others is a bad idea, as is outsourcing your investment research on individual stocks.
- Do not use the AFR as a good guide for the importance of results. The papers (with some exceptions) will simply rewrite the puff media release written by the company. They often confuse the difference between actual and reported results, will confuse earnings for revenues, and will downplay important b[parts of results while highlighting unimportant parts.
- If you don’t know, ask!
- If you don’t understand something, you are well within your rights as a shareholder to contact the company. Try the investor relations team, who should be able to answer your queries and clear up any confusion.
- Don’t forget, that shareholders are the ultimate owners of companies, and that means investor relations technically works for you!
Good luck out there, team. Its likely that I will have some difficulty keeping post volume up over the next month, owing both to reporting season and life. I wish you all large profit upgrades and dividend increases!
