Look for stocks with pricing power during August’s reporting season: Katana Asset Management

With weaker earnings likely to define next month’s reporting season, courtesy of myriad headwinds, including escalating input costs – especially from fuel, labour and supply chains - Romano Sala Tenna of Katana Asset Management suggests investors focus on stocks with the pricing power to pass it on.

While any company with physical products will be in the crosshairs of higher input costs, Sala Tenna suspects those more directly exposed to diesel/fuel, labour and supply chain costs include stocks in the mining and retail sectors [amongst others].

Despite the earning headwinds, including higher interest rates, Sala Tenna expects the ratio of companies able to match or beat consensus forecasts [during reporting season] to be close to the historical average of around 60/40.

Scrutinise the underlying commentary

Sala Tenna recommends investors pay particularly close attention to the commentary accompany full year results as they will take greater importance than previous years.

Given the collapse in pricing over the past two years, he suggests investors look for specific reference within a company's results to plans to pass higher input costs on.

He cites CSL (ASX: CSL), plus quality tech players as favourably positioned to do so.

According to Tyndall Asset Management, other stocks with pricing power include larger brands such as Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG), and supermarkets like Coles (ASX: COL) and Woolworths (ASX: WOW).

How much pain is already baked-in

From a market positioning perspective, what investors also need to glean during reporting season, he adds is how much of any company’s result is already baked into the price, and how much is forward looking.

That’s especially relevant this reporting seasons, adds Sala Tenna given the degree to which many stocks have been oversold.

“While we suspect inflation has peaked, we expect to see [during reporting season] companies provide justification for being able to negate or not provide future earnings guidance,” Sala Tenna noted.

Avoid long duration

Given the degree to which growth stocks have been pummelled this year, Sala Tenna suggests investors want to be either sitting in cash or high alpha – aka outperformers - short duration or in defensive stocks – that they don’t have to be positioned in for the next three years.

“Also look out for stocks awash with cash that could surprise with some kind of corporate activity, be it buy back, special dividend or similar,” suggests Sala Tenna.

“For this reason, we like Santos (ASX: STO) and Coronado Global Resources (CRN), and given that gearing on Woodside (ASX: WDS) is so low, we could see greater returns to shareholders in some form.”

Woodside share price over 12 months.