ASX reporting season: How to play it and what to watch out for — Week 3

Macquarie says the past week of results provide further evidence of a slowing cycle in response to higher interest rates but also one that demonstrates resilience in the face of headwinds.

The second week of earnings, which included results from names including Commonwealth Bank (ASX: CBA), QBE Insurance (ASX: QBE), AGL Energy (ASX: AGL) and Boral (ASX: BLD) were "again mostly in-line with expectations for the June half," the analysts said.

Source: Macquarie Research

"The two best results were building materials stocks James Hardie and Boral, as positive surprises on sales and margins drove material upgrades to FY24 consensus earnings."

Week 2: Key Takeaways

• Downgrades to FY24: Only James Hardie and Boral have seen EPS upgrades of more than 5% for FY24, while names including Charter Hall (ASX: CLW), Credit Corp (ASX: CCP) and ResMed (ASX: RMD) had material EPS downgrades.

• Negative reactions: The average performance of reporting companies is -2.4% on the result day. The best performers include James Hardie (+14%), Boral (+8%) and CommBank (+2%) while notable losers include Coronado Global (-12%), Downer (-7%) and Charter Hall (-5%).

• Disappointing guidance: There were 7 stocks that provided quantitative guidance, of which James Hardie and Boral were positive surprises and the other five were mostly softer than expected.

• Market outlook: "Based on share price reactions recently, the market seems to want to rotate to early cycle sectors such as Building Materials and Retail as slowing inflation and the RBA pause seem to support positioning for a soft landing."

Week 3: Ideas

A few buy ideas heading into Week 3:

• Buy Idea #1: CSL (ASX: CSL) has already "re-set FY24 expectations and is oversold". The stock is down almost 15% since its guidance update on 13 June and trading at levels not seen since June 2022.

• Buy Idea #2: Allkem (ASX: AKE) and Pilbara Minerals (ASX: PLS) are viewed as two ASX 100 stocks that are more likely to have consensus upgrades.

CSL 12-month price chart (Source: Market Index)

Plus a few stocks to avoid or at risk of earnings downgrades:

• Downgrade risks: Northern Star (ASX: NST), Woodside (ASX: WDS), Santos (ASX: STO), IDP Education (ASX: IEL) and Reece (ASX: REH) are all ASX 100 stocks with downgrade risk for FY24.

• Oversold stocks: Northern Star shares are down almost 20% since mid July, which makes the "downside risk from any negative surprise at their result should be more limited."

Northern Star 6-month price chart (Source: Market Index)

As well as overbought names to be careful about:

• Overbought stocks: "Orora (ASX: ORA), Domain (ASX: DHG), NWR Holdings (ASX: NWH), Seven Group (ASX: SVW), Magellan (ASX: MFG), Mirvac (ASX: MGR) and Netwealth (ASX: NWL) are all relatively overbought based on Williams R."

Orora 12-month price chart (Source: Market Index)