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Is Post Reporting Season The Right Time To Buy Shares With Momentum?
BY KENT KWAN - 02/03/2016 | VIEW MORE ARTICLES BY ATLASTREND

It has been a busy reporting season both domestically and internationally. As usual, some great news, some good news and some you would rather not know about. For part 3 of our series on how our investment team assess real life investment situations, we explore why immediately after reporting season is the best time to buy shares with strong momentum.

When we invest we look at valuation, bottom up fundamentals, growth prospects etc. All the things that are well covered by many industry participants. However, we also overlay momentum.

So what is momentum when it comes to investing in shares?

It is looking for factors in a share that show the company is running in the right direction. In many instances, immediately post reporting is the best time to judge these factors. There are a number of momentum factors but for now let’s focus on the main factor being earnings momentum.

Earnings momentum matters

The track record of a company’s historical earnings is important. However, the track record of a company’s future earnings estimate is even more important for determining share price returns. What do we mean by this?

As an example, let’s take a look at Facebook shares (note, for full disclosure AtlasTrend currently owns Facebook shares in one of its funds). The following chart shows the consensus earnings per share estimate for Facebook’s FY2016 earnings since 1 January 2015 which has increased substantially over the past 12 months. Why has this happened?

Either very high paid research analysts have been consistently underestimating Facebook’s earnings potential or Facebook’s management have been relatively conservative in its future earnings guidance. Both are great signs because it indicates a company that is able to consistently manage and beat earnings expectations. Since the sharemarket trades on expectations, that can only lead to one outcome, a higher share price.

We love an earnings estimate chart that looks like Facebook’s chart. We know from experience it usually means the company has the operational systems and people in place to keep delivering earnings upgrades. Once a company has this operational capability, it usually retains it for quite some time – success breeds success!

If you can buy shares with earnings estimate charts like this on a reasonable valuation then you should be onto a winner.

The reverse is equally (or perhaps even more) true. Once a company loses operational and earnings momentum over a period of time, it can be very hard to regain it. Usually it requires a wholesale change in management and strategies. See below Woolworths’ earnings estimate chart as a prime example.

With reporting season just finishing, most companies have provided some guidance as to future financial prospects. It is now the perfect time to look at any recently updated earnings momentum for your portfolio of shares.

We would suggest any shares with a string of earnings upgrades this reporting season and the last reporting season are well worth further investment consideration. If valuation (and other fundamentals) are right then it is likely the right time to buy before the next probable earnings upgrade arrives in the next 3 to 6 months.

Register at http://ow.ly/YUPuN for free AtlasTrend insights.



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Kent Kwan is a co-founder of AtlasTrend, a global equities fund manager that makes it easy for anyone to invest in the world's most thriving trends.


Disclaimer: Atlastrend Pty Ltd (ABN 83 605 565 491) is a Corporate Authorised Representative (No. 001233660) of Fundhost Limited (ABN 69 092 517 087, AFS License No. 233045). Any advice contained in this communication is general advice only. None of the information provided is, or should be considered to be, personal financial advice. The content has been prepared without taking into account your personal objectives, financial situations or needs. If you consider it necessary you should seek your own advice before making any financial or investment decisions. The information provided in this communication is believed to be accurate at the time of writing. None of Atlastrend Pty Ltd, Fundhost Limited or their related entities nor their respective officers and agents accept responsibility for any inaccuracy in, or any actions taken in reliance upon, that information.

Any managed investment fund product (Fund) mentioned in this communication is offered at www.atlastrend.com via a Product Disclosure Statement (PDS) which will contain all the details of the offer. The PDS is issued by Fundhost Limited as responsible entity for the investment fund products. Before making any decision to make or hold any investment in a Fund you should consider the PDS in full. The PDS is available at www.atlastrend.com or by calling AtlasTrend on 1800 589 778. Investment returns are not guaranteed. Past performance is not an indicator of future performance.



 

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