Criterion: Where to unearth value in the profit-reporting period

While macro issues dominate the conversation, the profit report season remains the definitive guide to individual stock performance.

Pic via Getty Images

• The February earnings season will guide on the health of key sectors including, tech, fintech and healthcare

• Experts nominate the small cap stocks to watch

• History suggests a bullish January leads to a robust market for the rest of the year

With the macro issues such as ‘what will Donald do next’ and ‘will DeepSeek control our minds and spy on us’ dominating the headlines, the February profit-reporting season is in danger of being usurped.

But keep an eye on the minutiae of the announcements: in an era when analyst coverage of the small to mid-caps has been slashed, there’s more scope for surprises.

Of course, the art is in picking the likely pleasant ones.

So far, the vibe is upbeat.

“There have been relatively few companies pre-announcing profit downgrades and the consensus earnings revision trends in January have been stronger than we typically see,” says Goldman Sachs.

Growth at G8 is child's play

RBC Capital Markets cites childcare leader G8 Education (ASX:GEM), online marketplace Temple & Webster (ASX:TPW) and buy-now-pay-later survivor Zip Co (ASX:ZIP) as stocks to watch.

“For G8 Education, recent cost reductions, positive workforce trends and the progressive exit from underperforming centres put the company in a strong position to meet undemanding expectations for calendar 2024,” the firm opines.

The firm cites Temple & Webster’s investments in marketing spend and growth in average order value and repeat customer sales.

ZIP is moving into “seasonally stronger quarters with strong momentum in its key growth market” – the US.

Zip is controlling asset quality while the market’s earning assumptions “appear conservative.”

Bell Potter adds that the US-oriented Block Inc (ASX:SQ2) and Life360 (ASX:360) are both trading at a massive 87% discount to their historic earnings multiples, with earnings growth to boot.

Asset managers are 'underdone'

Cyan Investment Management’s Dean Fergie says the investment ‘platforms’ – Hub24 (ASX:HUB) and Netwealth Group (ASX:NWL) – should benefit from the ASX's robust June 2024 half.

Hub24 shares have more than doubled over the last 12 months.

But stragglers such as fund managers Magellan Financial Group (ASX:MFG) and Platinum Asset Management (ASX:PTM) are yet to feel the love and should also benefit from the stronger market.

In the telco sector, E&P Capital says results will be influenced by higher mobile prices and cost reductions, with an emphasis on asset disposals to reduce gearing.

Put a Spark in your portfolio

Telstra (ASX:TLS) is OK if you're into boring, but the firm reckons there’s better value in trans-Tasman counterpart Spark New Zealand (ASX:SPK)

This is despite the ultra-competitive mobile market and tougher economic conditions generally.

But Spark’s $280 million sale of its remaining 17% stake in mobile towers business Connexa strengthens the balance sheet.

DeepSeek: friend or foe?

The tech sector will be closely watched not so much for earnings, but commentary on the impact of Chinese AI start-up DeepSeek.

RBC opines the development could be more of a friend than a threat, as it is likely to drive down the cost of software development overall.

Some companies will be able to price their generative AI offerings “meaningfully cheaper and drive greater volume.”

The firm believes expensive tech names could become cheaper on the ‘fear factor’ alone.

This presents buying opportunities for names such as Xero (ASX:XRO),  Technology One (ASX:TNE) naughty-but-nice WiseTech Global (ASX:WTC) and the can-do-no-wrong ProMedicus (ASX:PME).

At the smaller end, RBC calls out Hansen Technologies (ASX:HSN), a global provider of software and services to the energy, water and communications industries.

We suggest a gander at Eagers Automotive (ASX:APE), the country’s biggest car dealer as it benefits from a buoyant new car market and lower debt.

Shares in the international student wrangler IDP Education (ASX:IEL) have declined 35% over the last year, given migration crackdowns in its key markets.

The company tends to surprise at earnings time.

Will history repeat?

For numerologists, history suggests the market’s strong recovery in January – up 4.5%  – bodes well for the rest of the year.

The last ten times the market rose in the opening month of the year, on eight occasions the market was still up by December, by an average 11.7%.

That aside, the prospect of a Reserve Bank rates cut on February 18 would be especially positive for small caps and skews the odds in the optimists’ favour.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

    

Originally published as Criterion: Where to unearth value in the profit-reporting period