I do not spend sleepless nights before quarterly results are out.
We are well into earnings season now and, I have to say, my suspicion is that quarterly results carry less significance these days than they did when growth and interest rates were much, much higher. Closely watched by opportunistic traders, you’d do well to ignore quarterly updates if you have a long-term view and you have done your own research.
ARM/Rio/Unilever/Reckitt/Centrica
Take ARM, whose stock was hammered when interim results were released in July.
The shares of ARM tend to be volatile when results are released, so they can either fall or rise spectacularly, and that’s because its stock has appreciated a lot in recent year, and trades at a level that is consistent with a growth rate in the double-digit territory — but that doesn’t satisfy investors anymore.
While its five-year performance reads +210%, its stock price has risen only 8% over the last couple of years, and still trades at rich multiples base on its forward net earnings.
Well, regardless of its latest trading update, I consider ARM as a solid buy at 960p a share: it’s 20% below its 52-week high; revenues are rising, margins are up, its balance sheet is strong, and the yield it offers is also on its way up.
These trends have been visible for years now, so its quarterly results added little to the investment case.
Elsewhere, I did not bother spending much time on Reckitt‘s quarterly update, either. Its stock broke its all-time high in recent days as the company proved, once again, that it can deliver an outstanding performance. Growth, strong financials, solid margins and hefty cash flow metrics back the investment case.
Similarly, I did not spend much time to investigate neither Unilever‘s trading update, which boosted the stock and confirmed that the company is on the right track, nor Rio Tinto‘s results today.
The miner’s equity valuation is unchanged following a trading update that was better than expected — core cash flow is up and net debt is down, beating estimates — but Rio remains a delicate restructuring story, and nobody can firmly asses whether the light at the end of the tunnel is good news or the front of an oncoming train.
The same applies to a troubled utility such as Centrica, which has attracted interest from opportunistic traders of late, but whose stock seems to me fundamentally overvalued.
Get to Know What You Are Buying
In short, I know what am buying with ARM: long-term growth and yield. And I have to pay for that combination.
I also know what I am buying with Unilever and Reckitt: moderate growth, a solid yield and possible upside stemming from disposals or favorable trends in emerging market and, possibly, favorable currency swings.
I have to pay well in excess of 20x forward net earnings for both — so what?
I know I’d never touch Centrica, given its unappealing short-term liquidity profile. Yes, Centrica stock is much cheaper, but for good reasons.
This is to say that monitoring the daily and quarterly news flow would help you minimise what’s commonly known as “headline risk” but won’t prevent you from losing hefty sums over time. Get to know your companies and combine that knowledge with a better understanding of macroeconomic trends — this is my advice.
Of course, trading updates should be closely monitored, however, with smaller companies, such as oil and gas explorers, biotech firms and other risky, more cyclical businesses.