The all-important ‘results season’ is here again.
Results season, which got underway yesterday, is the quarterly hype-fest where listed companies unveil their profits or losses for the preceding three months. And of course this immediately affects share prices. In two of the last three outings, these have been marked by better-than-expected company profits, which has sent stocks higher.
In 2009, it’s been the best time to be invested in stocks:
Q1: from 7 April to 8 May stocks rose an average of +11.3%
Q2: from 8 July to 7 August stocks up +14.5%.
Q3: from 8 October to 7 November up +1%
These are some of the best four-week stretches we’ve seen in this historic bull run.
So is it again time to ‘fill your boots’ and buy the FTSE? We think not. This time, we’re recommending you stay away during the results season.
Why?
The third quarter was flat.
And we think that the fourth quarter could look even worse.
Yesterday, US aluminium producer Alcoa (NYSE:AA) opened the season with a whimper. The FTSE 100 index of leading shares slumped, dragged down by mining groups whose share prices suffered after Alcoa's earnings missed analyst expectations.
However, let’s not get distracted. Alcoa is only the prelude to the main event.
Friday sees JP Morgan (LSE: JPEL) release its results at 1:30pm UK time.
Like Alcoa’s, these results will move markets. They will set the tone globally for the remainder of results season. JP is considered the best-run financial institution in the world. So big things are expected there. If things are not good, the market will think things are very bad in the rest of that sector and rightly so.
Why a correction is good news for serious investors
This is what’s at stake…
If results are good and profits are high, the stock market uptrend will resume. However, if results disappoint, the FTSE could fall harder than we’ve seen since March last year. We’re not hopeful, but as long-term investors, a pull-back may not be such a bad thing.
You see, while the majority of investors will panic when stocks take a hit, I won’t.
Why? Two reasons.
- I've been investing in defensives (rather than cyclical) stocks that will prosper from a panic
- I already have a shortlist of stocks to buy at a lower price
Some selling would do this shortlist some good.
They need to unwind. If it can be done before we get in, that's great for us.
In November we identified the most popular stocks that you want to buy among our readership. The valuations were staggering then and they’re even more expensive now. The average price to earnings ratio is 45.5. The average price to book ratio is 4.4. And the average dividend yield is 1.5. These are too high, too high and too low (respectively) for us value investors. A poor results season may do these stocks good (for us) and knock them back into buying territory.
Here’s the list…
Eight stocks to watch
Presenting the top pull-back plays to buy when the market corrects:
- Randgold Resources (LSE: RRS) – This blue chip gold miner rose 69% in 2009 and it’s still rising. I’ve made the case for gold on more than one occasion and I must pay Randgold its dues. Its correlation with the price of gold is beneficial, but this stock is also highly volatile.
- BHP Billiton (LSE: BLT) – Infamous mining group has outperformed peers.
- Standard Chartered (LSE: STAN) – One of the only banks not to require direct government assistance.
- Apple (NASDAQ: AAPL) – Sales have beaten analyst forecasts every quarter in 2009 by a country mile.
- ICAP (LSE: IAP) – Tory Treasurer Michael Spencer’s broking empire made a fortune on the way down and on the way back up again.
- Burberry (LSE: BRBY) – International sales helped push Burberry into the FTSE 100.
- Tullow Oil (LSE:TLW) – Fortunes are made and lost trading this ‘high beta’ stock. In 2009, the bulls profited as the shares rose 109%.
- Goldman Sachs (NYSE: GL) – The first investment bank to pay back its TARP money has a knack for getting the big calls right.
In summary, we think you should play it safe in weeks ahead.
The market is trending higher, but it’s also overbought. We need to be wary of what could happen if we let our guard down. This is a market that demands exposure, but not 100% of your money. Continue to hold defensives and be ready to buy these exciting cyclical plays above if results season disappoints.
Best wishes,
Theo Casey
For The Right Side
Editor’s note: Theo Casey is the editor and investment director of The Fleet Street Letter.
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