If you want to know the most important thing about a share, read on.
Is it the stock price? The earnings growth rate? How many shares insiders own?
Or perhaps you lean toward a macro view of things. What will the RBA do? Is China growing…or slowing? Will elections worldwide derail markets?
So many questions…unknowables…variables…influences.
Well, I’m going to tell you what I think is THE MOST IMPORTANT THING…when it comes to considering a share.
The most important thing when it comes to a share price is what is already priced in.
This is what markets do, by the way. They ‘price in’ an outcome.
That outcome may or may not be correct, in hindsight.
A share price journey is investors constantly adjusting and recalibrating their expectations relative to incoming data.
You can see this all the time in the market.
For example…
Earlier this year retailers rallied strongly as their results came out. The results weren’t great. But they weren’t as bad as the market previously expected.
Overlaying this was the idea that central banks would cut rates heavily in 2024.
Investors began to ‘price in’ a retail recovery. That was in January.
By March the rally was…kaput! The sector’s been a clunker ever since.
What happened?
Inflation stayed high. That pushed back interest rate expectations. Spending data went from bad…to worse.
Investors began to price in an ongoing, negative environment for retailers.
Why do we care about this?
Because it highlights the importance of context in share market investing…
A lot of people don’t like this. They want a computer to scan for some metric and spoon feed them a winner or two.
But you cannot hope to know — or guess or assume — what is priced in for different sectors or shares if you haven’t been following how their current price developed from where it was yesterday, last week, last month and last year.
This is why the professional investor has an edge over the amateur. The professional can devote all his (or her) working hours to following the market, constantly. They have the context that tells them what the market is already pricing in.
An amateur must devote the better part of his (or her) day to their regular job.
This is not to say they can’t succeed. But, by sheer volume of time, the professional should be across more opportunities in a deeper way.
But there’s a ‘cheat sheet’ you can use to pinch their insight…for free…as soon as next month!
How so?
It’s called the August ‘reporting season’.
This is when hundreds of companies across the ASX will release their full or half year results…and their future guidance.
This is when investors discover if they have priced individual stocks correctly.
A company may, for example, be expected to deliver high growth in revenue. It does so — and the share price gets dumped on the day of the announcement.
Why? Perhaps the growth was high…but not high enough! Or perhaps growth was fine for FY24…but now expected to moderate in FY25. The market will adjust down its expectations accordingly.
Conversely, perhaps a company’s share price is wallowing at 52-week lows…unloved…forgotten…and it releases very positive results. Investors will bid it up!
How is this your cheat sheet? This is the moment, one of the few a year, that price and expectations meet across the board. It resets the market.
If you watch these results carefully, you’ll see which stocks rise, fall …or stay the same
This will convey whether the market — professional investors, in other words — are happy, disappointed or accurate in how they’ve been pricing in the current dynamic.
Any large move in price will convey this even better. It’s the big swings that communicate the most, up and down.
I mention the retailers above for this reason especially.
There’s no doubt they’re in the dumps, both in terms of price and sentiment.
But long-term opportunity often beckons when things look their worst / ugliest and most disappointing.
One could say the same about lithium currently too.
Why do we care, exactly? It’s possible this August marks the low point for the retail (and lithium) sector.
Let me emphasise the word ‘possible’.
I, for one, will be watching to see if retailers release poor results, and the share prices DON’T react down.
This will tell us that investors expected the dud result…and may now be looking toward a potential recovery…or at least a stabilising trading environment.
That would give us a base to work with. I like to look down before I look up.
If retailers sell down on their results, then we will likely assume investors are seeing ongoing weakness…and you and I can seek opportunity elsewhere.
It’s a big month coming up. In Europe, everyone is on holiday in August. Not you and me…it’s a crucial time of year for Aussie investors.
Don’t waste it.
Best,
 |
Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator
PS: And don’t forget you can view the long-term prospects of the market this way too.
For a long time, a smooth energy transition was getting pricing into the market. Now investors are adjusting to Australia’s wonky energy dynamic. My colleague Greg Canavan has everything you need to know here.
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