Don't panic over missed gains: How to navigate stocks that surge during ASX reporting season

Picture this – you've been stalking a company for days or weeks but you couldn't muster the courage to buy. Reporting season arrives and the company's result exceeds everyone's expectations. The stock soars by 10-20% by the end of the session, leaving you utterly crushed.

But fear not. Here's a little data to digest about why missing a massive share price rally during reporting season isn't the end of the world.

All the data below refers to the performance of stocks during the August 2023 reporting season (unless otherwise stated) via the Coppo Report.

Beats, Misses and In-Line Results

Across 334 company results from August reporting season:

• 24.5% beat consensus expectations

• 24.3% missed consensus expectations

• 51.2% were in-line with expectations

To add some perspective, the past 16 reporting seasons averaged:

• 28% beat consensus expectations

• 23% miss consensus expectations

• 49% in-line with expectations

Winners Keep on Winning

The Coppo report says beats have been up an average of 5.2% on the day of the result, while the misses, on average, have been down -6.3%.

The losers have bigger moves as humans tend to react more negatively to bad news and selling tends to take place aggressively.

More importantly, the beats averaged a 6.7% gain over the next four months, while the misses continued to drift a further 8.4% over the same period.

Post-Results Considerations

When a company delivers a stronger-than-expected result – A few things tend to happen over the next 24 hours:

• Massive trading volume: The result drives a lot of eyeballs to the stock and volume tends to surge (relative to recent averages)

• Changing hands: A strong result will see new shareholders join the register, replacing 'weak hands' with fresh hands

• Brokers run the ruler: Brokers will be busy crunching the new numbers. If the result was a massive beat, you should see something along the lines of "We upgrade/retain a Buy rating and upgrade the target price to XYZ."

A Glass Half Full

When a stock surges after delivering better-than-expected results, we often think, "Ah, it's too expensive now. I've missed the opportunity. It's time to go explore other options."

However, another way to look at it is that the company is now an even better version of itself. And this is now public knowledge, justifying a premium.

Given the above Coppo data, that premium is often somewhere above the day-1 rally. We'll go through a few examples below.

Example 1: Inghams

Inghams (ASX: ING) rallied 14.8% ($3.19) on the day of its FY23 result (17 August 2023). Its revenue and earnings both smashed analyst expectations, with net profit of $71.1 million compared to $58.0 million consensus (48% beat).

Analysts considered the result as incredibly strong, noting the company's successful rollout of price hikes to offset persistent cost inflation across fuel, feed and freight. The company's balance sheet was also a big surprise, enabling an unexpected dividend hike and the restart of growth projects. In terms of outlook, analysts expected to see many catalysts ahead, including further price increases and tailwinds for chicken consumption.

The next day, Inghams received a number of broker upgrades, including:

• Jarden upgraded to OVERWEIGHT from Sell, raised target to $3.56 from $2.19

• Bell Potter upgraded to BUY from Hold, raised target to $3.90 from $2.90

• Macquarie retained NEUTRAL, raised target price to $3.30 from $2.97

Inghams rallied as much as 12% over the next nine days. It's currently trading 36.4% higher (from the day after its results).

Inghams chart (Source: TradingView)

Example 2: Nick Scali

This is an example from the current reporting season – Nick Scali (ASX: NCK) rallied 16.6% (from an 8.4% open) on the day of its 1H24 result (6 February 2024). Here's a breakdown of the result:

• Revenue of $226.6 million or 1.9% below Macquarie estimates

• Net profit of $43 million or 4.9% ahead of Macquarie estimates

• Gross margin of 65.6% or 160 bps ahead of Macquarie estimates

• Interim dividend of 35 cents per share or 25.4% ahead of Macquarie estimates

• Written sales were particuarly strong in November and December

Putting it all together – The top line was pretty average but margins and dividends smashed expectations. For retailers, margins are everything. The magnitude of the beat might be the reason why the stock opened high and finished even higher.

Over the next 24 hours, Nick Scali received the following notes from brokers:

• Wilsons upgraded to OVERWEIGHT from Market-weight, raised target to $15.40 from $11.30

• Jarden upgraded to OVERWEIGHT from Underweight, raised target to $13.87 from $10.40

• Citi upgraded to BUY from Neutral, raised target to $15.55 from $12.60

It's been five trading sessions since the result and Nick Scali shares are up another 10.4%.

Nick Scali chart (Source: TradingView)

A Key Price Point to Watch

If XYZ company opens 10% higher at $10.00 – The $10.00 level is going to be significant for a number of reasons:

• The gap-up open typically acts as a key support level

• If the price falls below this level, it may indicate a reversal of the gap-up move

• This may prompt traders to exit their positions to limit potential losses

Technicals aside, if the result was truly that great, the stock should be able to hold its gains.

Boral (ASX: BLD) is a good example of the current reporting season. Here are the key numbers:

• Underlying net profit of $313.6 million or 14% ahead of consensus

• Net profit of $138.6 million or 28% ahead of consensus

• Full-year EBIT guidance upgraded to $330-350 million but 0.9% below Morgan Stanley estimates

Putting it all together – The first half was much stronger than expected, hence why the stock rallied 8.3% on the day of the result (9 February 2024). It's been two days since the result and Boral shares have gone nowhere. The upgraded guidance reads well at face value but already been baked into Morgan Stanley's forecasts.

"We sit modestly above FY24 guidance and see earnings upside risk in the near term. Despite this, valuation remains unsustainably high, requiring earnings materially above historical peaks," the analysts said.

Boral price chart (Source: TradingView)

Resmed (ASX: RMD) shares rallied 6.4% on the day of its Q2 result (25 January 2024) but gave back all of its gains by 9 February. The result topped revenue and earnings expectations, however, there was a moderation in sales growth after recent extraordinary expansion. Further gross margin expansion is expected in 2024, driven by factors such as favourable pricing, lower freight costs and supply chain improvements.

Resmed chart (Source: TradingView)

The Bottom Line

During reporting seasons, winners typically experience upward drifts as stocks adjust to better-than-expected numbers and analyst upgrades. The significance of the beat and outlook is crucial. If the beat is marginal or the outlook is already factored into expectations, the stock may give back its gains, either intraday or over the next few sessions.