Thursday, 9 February 2012

Markets, Company Reporting and Analysts Expectations: Contradiction and Confusion.

So what is really happening out there?
It seems to be a very strange time and confusing contradictions seem to be gathering around us giving very little direction to "followers".
Markets have staged a belligerent strength in the first 5 weeks of 2012 seemingly in opposition to the same old, same old coming out of Greece and Europe. 

Even through the night I am reading the BBC News 24 ticker saying that the Greek PM has failed to negotiate agreement but the main headline for the presented news is Capello's resignation. 
Running into the breakfast section of the day, the news is that a draft agreement (less the unagreed reforms) has been passed (with the buck) to the Troika (IMF, ECB, and EC). 
Some of the unagreed points are around pensions reform which unfortunately means that a potentially bankrupt state of the European Union wants to continue to have pension conditions that better those in more budget conscious member states. 
If the Troika does agree to this, what does that say about fiscal union?

Elsewhere, on the company reporting front it is equally confusing with headlines leading with record, and estimate, beating profits on one hand, and missed sales estimates on the other with a resulting push me, pull you on the share price.

In a moment of clarity, it actually underlined to me how little analysts seem to really understand despite the raft of research, data, and access to management. 
Perhaps they have too much data at times which might result in a very blinded perspective. If so it is a learning point for us all to occasionally step back and see the bigger, or long term, picture.

There seems to be a bit of a crisis around us so if an analysts estimate of sales (not the company's) is missed by a whole 0.2% is it really an issue. Particularly, if in the next article I am reading that the same company has beaten expectations with increased profits and margins.
If this has been achieved through cost cutting and "understandable" efficiency/productivity measures then I can fully appreciate that management has been pro-active and taken the right actions to adjust capacity and protect margins in line with the market opportunity. 
If the company has also kept one eye on the future and prepared itself for the next upturn even better.

I have heard this contradiction many times over the last 5 weeks and it seems to be more often than not at the moment, but it has taken me this long to knit the clues together to the form the view that I now believe that there are opportunities forming again amidst the confusion and contradiction. 
It is still about having the right management in place, and the results coming through at present seem to demonstrate that the right decisions on investment v. opportunity / capacity v. opportunity, are being taken. 
Many of these companies also seem to be building up cash and balance sheet strength in readiness for the upturn whilst consolidating performance through this and any development to the downturn. 
In many cases the dividend is also being ratcheted up and, despite the recent history of banking aside (in the run up to the credit crunch) most of these companies have been conservative with dividend increases and payout ratios over the last few years preferring instead to strengthen balance sheets in turbulent times.

I also used the term "follower" at the beginning of this post as a reference to many of the expert views that it is the contrarian investors (not the followers) that seem to consistently beat the market and their peers sometimes by investing at a time when the weight of short term opinion is less enthusiastic about the company or in this case looking beyond short term disappointments to see the bigger picture on market share, scarcity of resource, constraints, barriers to entry etc. as long as they have the view that good management is in place.

In terms of missing an overegged analyst expectation on one measure (that could be in as short a time frame as 3 months), if the foundations continue to be solid then it is only a matter of time before actual performance catches up with opportunity.

The opportunities might all get swallowed up if the right noises come out of Greece and the Troika but, I think that the theme of the next few months will be this confusing contradiction in company reporting that might yet throw up more opportunities.
If nothing else then the "de-risking" of attitudes, should Greece step back into the circle, could result in an oversold situation on defensive sectors as investors look for more exciting sectors.

So following this new enlightenment, and all the company reporting, I need to retrawl my watchlist and see what comes up. 
Wish me luck.

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