Mad reporting season is upon us and most analysts are expecting it to be a reasonably good one. It’s that time of the year when every ASX listed companies release their FY profit result. Most report their earnings as at 30 June (full year) and 31 December (interim or half-year). So this time around most companies will be posting their FY results. It’s a nervous time for investors, because any unexpected fluctuations in a company earnings can have a significant impact on its share price. It’s all about market and analyst expectations. The aim of the game is to beat these expectations. If a company can do that, it is handsomely rewarded and cheered on. Share prices rises. However on the flip side, if a company misses expectations it is severely punished and its share price hammered. It’s much like a game of darts where one throws small missiles at a dartboard fixed to a wall. The aim of the game is to hit the bullseye for maximum points much like when a company hits expectations. The dartboard is divided into decreasing circles forming a 1-10 target area rather like an archery target. Hitting outside the outer wire scores nothing much like when a company misses expectations. Hit a bullseye and the crowd cheers. Usually reporting season will start with a few shock profit downgrades. These are the companies that have performed poorly during the half. They will confess their sins and announce a profit warning before they report. They do this a few weeks prior to prepare the market for either a miserable earnings number (profit downgrade) or an upbeat earnings number (profit upgrade). A profit downgrade can result in a savage 15%-30% sell off which can be exacerbated by shorters. The downward movement can be for a short period of time, which creates a risky but profitable trading opportunity. Sometimes a profit upgrade doesn’t produce an equal percentage rise. A profit upgrade might only cause the share price might to rise only 5%. It could be the quality of the earnings. Either way the game here is to make sure you aren’t holding companies that are likely to issue a profit downgrade. Yes easier said than done. Providing guidance isn’t a stock market rule or requirement. But the market has become accustomed to some sort of guidance. If no guidance is given, analysts put forth their forecasts which filters out to the market. The move to guidance really means that the ASX has a confession season before each reporting season. This week iSentia (ISD) did just that. The media monitoring and content group downgraded its profit forecast on Tuesday and thoroughly disappointed the market. Shares were whacked by 21%. Ouch. Australian Pharmaceutical Industries (API) fell by 13% after it too downgraded its FY earnings guidance from 10% to 5% growth this year. The opposite is also true via a profit upgrade where the share price rises. But this is a rarity. Treasury Wine Estates (TWE) shares rose this week after the wine maker reaffirmed its 2H earnings guidance and said growth prospects in the China market remain intact. What to expect this reporting season Whist…

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