by Angus Nicholson, IG
The early results from earnings season are unsurprisingly having a big influence on stocks returns. Credit Corp (CCP) and Downer EDI (DOW) both had upside earnings surprises, which helped them see the best two weekly performances. Seven West Media’s full-year results saw the opposite reaction, with the stock crashing after SWM warned of a 15-20% fall in FY2017 earnings. DOW’s better than expected earnings also helped see buying in its competitor Monadelphous Group, which continues to rally despite being the eighth most shorted stock in the index.
Market Internals
Market internals have reversed their downward course just as the ASX began to catch some buying again after it dropped below the 5500 level. The percentage of companies above the 50-day moving average continues at an elevated 77.5%.
Sector Performance
Only the energy and materials sectors ended in positive territory for the week. The spot oil price looks like it may have corrected last week after seeing a 20% decline from its recent highs. With the outlook improving for the spot oil price, investors were keen to jump back in and start picking up energy names again.
Factor Performance
Small Caps continue to dominate the comparative factor performance for listed Australian firms. And the factor rotation continues apace with comparatively poor performances in both infrastructure and high yield, which have previously performed quite well.
Short Positions
Flight Centre and MYOB both have more than 23% of their entire free float of shares taken up by short positions. Even though a number of commodities related stocks have been rallying of late, investor sentiment in WorleyParsons, Monadelphous, and Western Areas is still very negative as shown by the still large short positions in these stocks.
Price Target Premiums
The materials and energy sector dominates the stocks trading at large premiums to their consensus price targets. Popular shorts, MND, WSA and WOR all make appearances in the top ten.
Value Screens
Tobias Carlisle’s Acquirer’s Multiple, which is a firm’s enterprise value divided by EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) minus capital expenditure. While familiar disliked names in the index show up, such as MND, FLT, DOW, Seven West Media (SVM) is now showing up as the third most compelling stock in this valuation metric. When a stock has a massive earnings driven selloff and begins screening up in the valuation screens then that is often a strong signal that 10% rebound in the price could be imminently on the way.
Momentum Stock Picks
Note: These momentum stock recommendations are based off backtested results looking at a 3-5 day holding period with a 5% stop loss on every trade.
DOW – (Buy)
The very low expectations for Downer EDI’s FY2016 earnings were surpassed last week, and given the still very low valuation metrics on the stock it looks like it can almost only move higher over the next twelve months.
SWM – (Buy)
After a dramatic earnings related selloff, Seven West Media looks to have found support and bounced off the A$0.76 handle. The stock has also begun to show up on the valuation screens, and from these levels the risk-reward for the stock looks very compelling.
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