Small stocks deliver for Quest in reporting season

paralympicsSmall stocks delivered for our Quest portfolio during the August reporting season. Quest holdings in 9 separate stocks lifted more than 5% over the month to deliver a small positive return in August of 0.2% compared to the market which fell 1.6%. The stand out performer was Oneview Healthcare, up 48%, while others included Updater (up 11%), iSelect (up 11%), Vista Group (up 10%), Amaysim (up 5.8%) and Galileo Japan Trust  (up 7%).

The key learnings from the avalanche of data recently absorbed are that the season was generally lack lustre.  Only 20% of stocks saw an upgrade to consensus earnings post the season while the 2nd half performance looked generally sluggish; probably hampered by the July election. As in previous seasons, reporting above expectations resulted in strong price performance which was the case for Bluescope Steel, Downer, Ansell, Seven Group and GWA Limited. Disappointment saw prices fall for Seven Media, Estia Health, Japara Health, Newcrest, Origin Energy and CSL.

Quest owned stocks saw 24 of our 31 stocks deliver in accordance or ahead of expectations with 4 falling short and 3 not reporting. As well as a flurry from the above named smalls our portfolio also benefited from good performances by Fortescue Metals up 10%, Macquarie Bank up 8.5%, Ramsay Healthcare up 5.3% and Lend Lease up 5%.

We expect the US Federal Reserve to raise rates this year but the impact of this long awaited move is hard to gauge. More importantly, once rates move the market may become preoccupied with the timing of the next move rather than the actual increases. This suggests the market will be in a macro frame of mind rather than a fundamental for the next few weeks. The US election, BREXIT fallout and rumours of further invasive Chinese offshore atoll construction will also focus attention on the macro.  We also anticipate that the lack of volatility in markets (Dow Jones has only moved once in eight weeks by more than 1%) is likely to be replaced by a more volatile backdrop with the chances of a negative correction being quite high.

While macro pondering continues, Quest will remain focused on fundamental stock valuation which has seen us reduce our positions in APA Group, Amaysim, Reliance Worldwide and Greencross during the month. Our cash levels are above average at the moment at 10%.