Macquarie's end of financial year strategy: Why weak momentum stocks are set for a rebound

Macquarie says the end of the financial year presents an opportunity to buy stocks with weak momentum and get out of stocks with poor earnings growth.

In his strategy 'Trading the Financial Year-End", Macquarie's Head of Global Quantitative Research John Conomos, outlines a two-step strategy that seeks to benefit from predictable seasonal effects around year-end.

June has the tendency to see stock with low momentum and high risk underperform as investors seek to minimalise capital gains tax liabilities, according to Conomos. While stocks with good momentum and low volatility tend to outperform as they may be kept for year-end window dressing.

Shifting to July, these trends have the tendency to reverse as "investors adopt a longer-term perspective and become more risk-tolerant."

Source: Macquarie

Weak Momentum Picks

Bluescope Steel (ASX: BSL) is highlighted as the only ASX 50 stock that has an Outperform rating but fell at least 5% in FY24. The stock is currently down 3.3% in the last twelve months as volatile economic conditions have led to weaker steel prices. "We still expect earnings recovery from this juncture - recovering steel prices (and spreads) should support this," Macquarie analysts said in a note dated 15 April.

From the Mid Cap 50, Worley (ASX: WOR) is an Outperform rated stock that fell 6.8% in the past twelve months, with above average volatility. The company has faced a number of setbacks including challenged project economics (e.g. hydrogen), upcoming UK and US elections creating uncertainty around future government funding and a flat backlog over the two months to 31 February 2024.

A few volatile ASX 100-200 that fell in FY24 and currently rated outperform include Sims (ASX: SGM), Credit Corp (ASX: CCP) and Karoon Energy (ASX: KAR)

Masked decliners

The report coined the term "masked decliners" for stocks that outperformed in FY24 but the gains were driven solely by price-to-earnings expansion. In other words, the price went up but earnings (or earnings expectations) did not.

This group includes:

• ANZ (ASX: ANZ)

• Commonwealth Bank (ASX: CBA)

• Wesfarmers (ASX: WES)

• Westpac (ASX: WBC)

• Wisetech (ASX: WTC)

"In relative terms, Banks are the second most expensive sector (after Tech) with PE 2.6 standard deviations above average," the report said.

Hidden growth

This refers to a handful of stocks where underperformance has masked an improvement in FY25 earnings expectations. The ASX 100 stocks rated Outperform for this criteria includes:

• Resmed (ASX: RMD)

• Bluescope Steel (ASX: BSL)

• Block (ASX: SQ2).

In terms of small caps, the Outperform-rated hidden growth stocks includes:

• Coronado Global (ASX: CRN)

• IPH (ASX: IPH)

• De Grey (ASX: DEG)

• Auckland International Airport (ASX: AIA).

New Zealand exposure, H2 skew

"Companies with high NZ exposure have had a high number of negative earnings announcements since the start of May," the report said.

"Downgrades highlight the cost-of-living pressures as a cause of weaker consumer sentiment and spending. A weakening jobs market and concerns about house price have also weighed on the consumer."

The stocks with 60-100% of revenue exposure to New Zealand include:

• Spark New Zealand (ASX: SPK)

• Chorus (ASX: CNU)

• Auckland International Airport (ASX: AIA)

• Fletcher Building (ASX: FBU)

A few stocks with moderate NZ revenue exposure that could potentially be negative impacted included Harvey Norman (36% of revenue from NZ), oOh Media (12.9%) and ARB Corp (10%).

Macquarie is also fairly concerned about companies with a high second half earnings skew, accompanied by consensus earnings downgrades. The top suspects were:

• Downer (ASX: DOW)

• Sonic Healthcare (ASX: SHL)

• Reliance Worldwide (ASX: RWC)

• Ramsay Healthcare (ASX: RHC)