Mad reporting season is upon us and most analysts are expecting it to be a good one. It’s that time of the year when every ASX listed company releases their HY profit result. Most report their earnings as at 30 June (full year) and 31 December (interim). So this time around most companies will be posting their HY results. Reporting season takes place during the month of February and this year will be driven by strong global equity markets. The bull market that took place on a worldwide scale last year has pushed earnings and expectations higher. In Australia, the resources and energy sectors have performed well heading into results, however bond proxies such as utilities, real estate and telecommunications have lagged. According to the latest Thomson Reuters earnings estimates, EPS for the S&P/ASX200 is forecast to grow by 7.0% in FY18, down from the 11.3% in FY17. This rate of growth is expected to be stronger overseas providing significant upside. The best earnings upside will be from Resources, Energy, Offshore Earners and Retailers. It’s a nervous time for investors, because any unexpected fluctuations in a company earnings can have a significant impact on its share price. Especially when a story is heavily shorted. 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 a bit like the boardgame Snakes and Ladders. For anyone that hasn’t played the timeless board game, Snakes and Ladders moves players in a zig zag pattern up a grid by the roll of a dice. Placed on various squares are snakes and ladders. Land on a ladder and up you go. Land on a snake and down the chute you fall. That’s the beauty of the game, it’s a real roller coaster ride. One throw of the dice can decide your fate. In a single move you could either be climbing a ladder to the top or sliding down a snake to the bottom. Reporting season is played in much the same way. If a company surprises on the upside up the ladder it goes, share price rises and PE goes up.  If it disappoints on the downside, down the snake it tumbles, share price falls. It’s the way reporting season goes. It can be unforgiving but that’s the attraction, no knows with upmost confidence how well a company has performed right up until they report. In the lead up to the big game, you can get some idea of who is expected to perform well and not so well through the numerous broker predictions and profit upgrades/downgrades. Whilst some take broker predictions as gospel, even the analysts get things wrong and their predictions can be far off. You can see why it can be a nervous and stressful time for both investors and brokers. 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). Here are a few company announcements to look out for prior to reporting season. Some are snakes (bad) and some are ladders (good). Snakes (bad) Profit/Earnings downgrade prior to result Guidance downgrade Cut in dividend Restructuring Write-downs, impairments Challenging conditions Capital management – capital raising to repay debt Outlook statement Ladders (good) Profit/Earnings upgrade prior to result Guidance reaffirmed / upgrade Raise in dividend Commodity price assumptions Cash flow is positive Capital management Outlook statement Asset sales / divestments 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%-10%. 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…

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