Reporting season is when companies release the numbers for what happened in the last financial year and provide an update on what to expect in the new financial year.
For analysts, it is all about looking for changes.
If you want the value of a company to go up or down, you need something to change. If everything was to remain the same, then the value of the company should not change.
Have you ever invested in a solid, good company, only to have the share price remain static for several years? Or seen a company announce a record profit, only to watch the shares fall? Or held a terrible company, only to see the share price rocket?
What is it that moves share prices?
The key inputs into the value of a share are forecast earnings and a risk-free rate. Hence for a share price to move, you usually need a catalyst, which means different earnings in the future. A positive catalyst could be new management, new strategy, new product, or better sentiment. Negative catalysts could be customer churn, higher costs or increasing competition.
At the heart of a stock price moving upward are changing conditions, which are positive for the earnings outlook of the company. Many fundamental analysts favour buying strong, good quality companies but it is often the companies that are out of favour and have priced in too much bad news, that have the most stunning price recoveries.
During reporting season, we look for affirmation that the companies we own are travelling as we thought or better. We also take the time to trim risk and reduce positions in companies that are not travelling as well as we anticipated.
At Burman Invest, we have had a great reporting season with our portfolio growing more than triple our benchmark index. We see it as an affirmation that the companies we hold are seeing an improving outlook which is driving up the value of the business.
Chief Investment Officer