Since the GFC one of most unpleasant feelings for an analyst or fund manager is when a company held in their portfolio posts a notice on the ASX of a “Trading Update”. Since 2008, this has almost always been a downgrade of a company’s expected profits, which then results in a sharp price fall, gnashing of teeth and tears from the analyst responsible for recommending the stock. In recent example of this came from Flight Centre who warned two weeks ago that they were unlikely to meet their targeted profit growth due to consumer confidence over the Australian election and the Brexit referendum in the UK. The company’s share price fell by 17% wiping $627 million of the travel company’s market capitalisation based on a change in expected profit in 2016 of only $30 million! In this week’s piece we are going to look at downgrades and next week I am going to follow up with a piece on earnings shenanigans, or what a company can do to dress up their earnings.
The months leading up to the end of each reporting season are known as “Confession Season”, which is usually May/June and November/ December of each year as the companies become aware that they are not going to meet profit expectations and then “confess” their sins.
Read more here.