This reporting season has seen most companies reveal substantial drops in earnings, but despite this we have actually seen many stocks rise after the event. In some cases such as with Leighton holdings, the rise was due to the fact that although the result was bad it nonetheless came in above expectations. What’s also important is that the underlying operating profit was solid, and other fundamental metrics showed signs of improvement. This was not an isolated event.
In other cases the rise has been due to the fact that there were very few nasty surprises. Sure, many results were poor, but that’s what the market was expecting and share prices had already fallen to reflect that. More to the point, in most cases the outlooks that were offered differed little from previous guidance and that has given investors the sense that while things may be difficult for the time being, the market has already factored this in.
To me this means that there is a good chance that we are extremely close to the bottom. For us to see another significant market pullback we would need to see evidence of further substantial worsening in the economic climate – and while that’s certainly a possibility I believe any further deterioration will lack the severity of the past 6 months.
What’s also encouraging is that, as I said last week, many companies have taken the prudent step of shoring up their balance sheets either by raising additional capital, suspending capital projects or easing back on dividend payments. Of course, none of these things are what we like to see and have caused share prices to tumble, but at this stage, after the event, it means we can be much more confident in the viability of the business and can take advantage of the current discounted share prices.
A lot of people I speak with have a real desire to get back into the market and take advantage of the current situation, but they keep telling me they are going to wait for things to improve. This makes good sense from a trading standpoint but I really don’t understand it from an investment perspective. The fact is that by the time we can be confident that the market is recovering, a good portion of the gains would have already been made. Anyone who invests prior to this will take full advantage of the bounce, even if it means experiencing a modest paper loss prior to the turn around.
To quote William Bernstein: “If you can obtain high long-term returns, what does it matter if you have lost and regained [part of] your principal along the way?”
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