The investment management company said it expects only minor top-line improvement in many companies, with the majority of the heavy lifting in relation to earnings improvements coming from internal cost-cutting and efficiency programs.
Dalton Nicol Reid chief investment officer Jamie Nicol said prices will be highly vulnerable to any earnings misses but this will mainly be in relation to 2015 expectations, with most companies already guided to 2014 results.
Mr Nicol said this reporting season investors should also be looking for companies with characteristics such as a “diversified or deeper pool of growth opportunities, given patchy domestic recovery” and companies with “emerging growth stories”.
He also believes investors should be looking for companies demonstrating strong cash flow generation and reducing leverage.
“This supports M&A growth going forward especially with low interest rates or potential capital management,” said Mr Nicol.
Mr Nicol said investors should also be watching out for companies with strong business models operating in cyclical/consumer sectors being dragged down by weak sentiment.
He said investors need to consider how these companies have withstood recent consumer-related weakness and if activity levels have improved.
Dalton Nicol Reid will also be looking out for any divestments in resource companies and any “green shoots among mining service companies".
In terms of the bank, Mr Nicol said investors should be watching for any signs of deterioration in bad debts and any indication of increased competition.
Investors also need to determine if the earnings of de-rated high PE stocks are meeting the expectations implied by their high multiples, he said.
