Reporting season represents a great opportunity for investors to get “tangible feedback from the market”, but investors should refrain from overreacting, says Bennelong Funds Management.
As companies move into ‘reporting season’ and release their half-yearly statements, investors should take the opportunity to conduct research about potential upside and downside risk of stocks owned, according to a statement by the boutique fund manager.
But Bennelong head of research relationships Stuart Fechner warned against investors reacting too quickly to announcements made during reporting season.
“It’s important for investors to understand what reporting season is all about, but even more important to understand what impact, if any, these reports will have on their long-term investment strategies,” Mr Fechner said.
“For instance, just because a company’s share price drops following its report doesn’t mean there are problems with the company and investors should get out quick.
“There may be many reasons for a short-term drop in share price, which shouldn’t influence investors with a sensible long-term strategy.”
The season should be taken as a chance to review the prospects, results and outlook of a company, rather than just a short-term assessment of a company’s previous performance.
“Reporting season is one of the few times investors get tangible feedback from the market,” Mr Fechner said.
“Understanding projections for the coming financial year is as important as the result itself.
“A company may report financials that are in line with market expectations, but any indication of a weak forecast will often result in a share price drop.”
Come reporting season, Mr Fechner advised investors it was “critical” to have “clear expectations for every stock”.
“As good, bad or indifferent company results are reported, there are three choices for investors: hold the current investment, buy more, or trim the holding (or sell completely),” he said.
“There is little prospect for strong outperformance from a stock whose earnings perform in line with market expectations, however bullish they may be.
“To see any sort of share price increase on the back of a reported result, the result itself must typically be at a better level than the market was expecting.”
But developing an expectation of stock performance requires a deep understanding of each company.
“This only comes from putting in the hard work on the ground, gaining the conviction you need and sticking with it,” Mr Fechner concluded.