ASX Share Tips Amid the fog of COVID-19

Richard Hemming

ASX share tips for upcoming company quarterly profit reports and beyond

Under the Radar Report talks about why we think there will be more big share price fluctuations when ASX listed companies start having to report hard performance numbers and how to have cash ready to invest. In this informative market update, Under the Radar Report tells you the best ASX shares to buy right now.

In the wake of the immediate effects of COVID-19 there is room for surprise when ASX listed companies deliver actual results, which hopefully creates opportunities to make trading profits in companies big and small.

The reality of ASX shares to buy will be tested in three waves

Firstly, as 1Q20 numbers are released at the big end of town; then, in the pre-announcement season before June 30 there will be profit warnings; finally, in late August, there will be a wave of information as the real numbers for FY21 start landing, which will invariably deviate from analysts’ forecasts.
 
In short, we think that this market is fertile ground for Small Cap investors and we have increased the frequency of our ASX share tip updates and portfolio activity accordingly.

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Why there is the prospect of big company earnings surprises

The market is not good at gauging the effect of changing operations and the extent to which companies’ earnings are geared towards this. This is because very few analysts covering ASX stocks to buy, big and small, have experience actually working on the operations side of the companies they’re covering.
 
Analysts are held hostage to what the companies tell them and at the moment, they’re not telling them anything. This is partly because the companies themselves are confused about the financial affects of what’s going on from day to day.

What should you do as a Small Cap Investor?

As well as making trading profits from subscribing to higher quality rights issues and then quickly selling (see last Market Update) Small Cap investors may need to sell some stocks to raise cash in order to invest in some great stocks at cheap prices (look at our Small Cap Best Buys and Blue Chip Value Buys).
 
This environment is an ideal opportunity to reflect on how we maintained our discipline of taking profits into strength for Under the Radar’s Small Cap Portfolio at the end of last year.

Sure, everything we bought at that time has gone down, but we dodged a worse fate by making sure that we rapidly reduced what at the time were our two biggest holdings: Village Roadshow (VRL) at $3.35, and Ingenia Communities (INA) at $4.94. 

You only make profits when you take profits

The key take-away is that it is always important to watch your five or so biggest holdings very closely because it pays to remember that you only make profits when you take profits.

Fast forward to today and upcoming quarterlies

In our opinion many great new opportunities are likely to emerge once the downturn actually manifests itself in reported numbers, like revenues, volumes and costs. 
 
Under the Radar Report’s analysts are now watching for the first quarter reports (3 months ending 31 March 2020), which are due in coming days. This is where we’ll see the reality of COVID-19 on company profits.
 
Analysts are consistently loath to issue new forecasts until the companies give guidance. The information vacuum is magnified by the fact that companies do not wish to create rods for their back in these circumstances, and they have simply withdrawn guidance. 
 
We think there will be substantial sticker shock once Small Cap investors see some real numbers. In many cases, the real numbers will be quite a distance south from expectations, causing high share price volatility.

ASX Share Tip: You need to be selling as much as you are buying 

For instance, if you have been lucky enough to get some small parcels in stocks like Kogan (KGN) which we recommended at the bargain price of $3.50 in Issue 385, that have rallied a lot in a short time, you should consider taking some profits at the current $6. The current uncertainty highlights the importance of realising some gains and building your cash resources for fresh opportunities. And we have focussed on KGN because higher multiple stocks will have to run even faster to justify their premium.
 
We suggest you look at your own portfolio and consider selling any stocks that haven’t gone down by as much as the market i.e. have performed relatively well. For instance, the Under the Radar Report Portfolio has sold the rest of its stake in Bentham IMF (IMF), now called Omni Bridgeway (OBL), a stock on which the gains were still almost 200% over three years, and has started reinvesting into what we think may be cheaper stocks, like Superloop (SLC).
 
We have also cut our positions in stocks where we got it wrong, frankly, like Pharmaxis (PXS) and Reckon (RKN), even though these had declined markedly, mainly before the coronavirus struck.  Sometimes the benefit of freeing your mind from the burden of past mistakes is the best way to prepare mentally for the challenges of investing into a newly undervalued market.

Under the radar is cashed up and ready to invest

The Under the Radar Report Portfolio still has 30%+ cash, our biggest position Austal (ASB) has just confirmed guidance, and we’re looking forward to deploying money into some more great stocks, but we don’t see any great hurry since the recent sharp rally in some of our recommendations, in particular, the second XI we published in Issue 387, as well as our first XI published in Issue 385. We talk about a number of these stocks in our next issue.

About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

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