Weekly review: higher profits needed to keep market pumping

Higher profits All Ords Australia stock market ASX 2019
WEEKLY MARKET REPORT

As Australia’s share market finally pushed briefly into record territory after 11 and a half years, the hopes of further rises now ride on the actual results that will be reported by Australian companies over the next few weeks.

While the market might be travelling okay on the back of falling interest rates and a booming mining sector, shareholders in individual companies will be nervously waiting given that any disappointment will be met with some nasty share price retribution.

This week will be an interesting start with a host of well-known companies revealing their quarterly profits including ResMed, Rio Tinto, Transurban, Commonwealth Bank, Suncorp, AMP, AGL Energy, Mirvac and Insurance Australia Group to name a few.

Companies that disappoint could be in big trouble

In its preview of the profit reporting season, investment bank Macquarie warned that stocks that disappoint investors could be in for harsher than usual treatment, which might explain why AMP has been downgraded, with some analysts now pointing to the potential for a quarterly loss.

Macquarie said most of the 20% rise in stocks since last December had been driven by expanding price earnings multiples, with earnings needing to rise to back up these higher share prices.

Miners looking good but industrials could struggle

Macquarie’s view is that industrials have the greatest risk of underperforming, while there are high expectations for resources thanks to surprisingly high commodity prices, particularly iron ore.

That should boost the earnings per share of some of the big iron ore players by up to 30%.

Some of the stocks that Macquarie thinks could outperform include Fortescue Metals Group Limited (ASX: FMG), property group Charter Hall Group (ASX: CHC), oil and gas engineering group Worleyparsons (ASX: WOR) and milk products supplier A2 Milk Company Ltd (ASX: A2M).

Some of those that could disappoint include former BHP offshoot and diversified miner South32 Ltd (ASX: S32), Commonwealth Bank of Australia (ASX: CBA) and hearing implant maker Cochlear Limited (ASX: COH).

Almost by definition, profit reports produce lots of surprises and this one is sure to be no exception as some companies beat the street while others really disappoint investors.

Record breaking week

It was a memorable week on the share market, with the broad All Ordinaries index finally cracking through its previous record set way back in November 2007 when it traded above 6,900 points on Thursday.

There was a small slide on Friday but overall the mood was positive as expectations that the Reserve Bank of Australia would provide further stimulus pushed up share prices.

The All Ordinaries closed the week up 93.1 points, or 1.4% at 6,879.3, while the ASX 200 index finished the week 93.1 points higher, or 1.4% at 6,793.4.

On Thursday, the benchmark ASX 200 was just 10 points away of its highest-ever close.

This record-breaking performance is in stark contrast to the actual economy which is growing slowly with inflation and earnings sluggish and China slowing down as well.

Big banks benefit from the search for yield

The drive for yield is causing investors to buy more shares and is expanding the earning multiples buyers are prepared to pay.

The big banks were one of the driving forces behind the good week, adding 30 points to the index off their own bat.

While the big banks all fell on Friday, NAB (ASX: NAB) closed the week 3.6% higher at $28.49, Westpac (ASX: WBC) was 2.5% higher at $28.57, Commonwealth Bank (ASX: CBA) rose 0.6% to $82.59 and ANZ (ASX: ANZ) jumped 1.5% to $27.78.

Big stocks add support

There were plenty of other big supporters on the market during the week with retailer Woolworths (ASX: WOW) rising 2.6% to $35.23, while competitor Wesfarmers (ASX: WES) was up 3.4% to $39.74.

Blood product group CSL (ASX: CSL) continued its rise above the $200 level, up 0.8% to an impressive $226.29.

Most of the energy stocks were also much stronger as oil prices began to rise again due to renewed tensions in the Middle East.

WorleyParsons (ASX: WOR) was a strong performer, trading 11% higher at $16.09 for the week.

Meanwhile, over the same period Woodside Petroleum (ASX: WPL) was up 2.2% to $34.34, Oil Search (ASX: OSH) was up 5.8% to $7.06, Origin Energy (ASX: ORG) rose 4.5% to $7.85, Beach Energy (ASX: BPT) increased 8.7% to $2.06 and Cooper Energy (ASX: COE) pushed 8.4% higher to 58¢.

After a stellar run due to a tight market for iron ore due to production restrictions on Brazillian miner Vale, news that Brazil will resume some of its processing operation saw the big iron ore mining companies slip a little during the week.

BHP (ASX: BHP) fell 0.5% to $40.85 and Rio Tinto (ASX: RIO) was down 4% to $98.26.

On Friday most sectors fell a little, but technology stocks were hardest hit with Technology One (ASX: TNE) down 3.9% to $7.82, Altium (ASX: ALU) fell 2.3% to $36.82 and Appen (ASX: APX) dipped 2.1% to $30.38.

Small cap stock action

The Small Ords index continued to rally, up 1.45% to 2,970.2 points for the week, despite a 0.91% fall on Friday alone.

ASX 200 Small Ords all time high chart July 2019
ASX 200 vs Small Ords

Small cap companies making headlines this week included:

Strike Energy (ASX: STX) and Warrego Energy (ASX: WGO)

Strike Energy and joint venture partner Warrego Energy have reported material gas coming to surface while drilling the West Erregulla-2 well with the Warrego gas project in WA.

Located in the North Perth Basin, drilling of West Erregulla-2 has been closely watched, with Strike announcing this week it had encountered the Wagina formation at 4,105m and 4,111m.

During drilling, Strike noted gas had been coming to surface flowing enough to light the rig’s flare.

Strike non-executive chairman John Poynton boosted his stake in the company, taking up more than 1.2 million shares worth $126,045 a day after the announcement.

Jervois Mining (ASX: JRV)

It was a huge week for Jervois Mining after the company revealed on Monday eCobalt shareholders had approved the merger between the companies’ despite First Cobalt Corporation’s attempts to throw a spanner in the works.

The duo then received the final go ahead from the British Columbia Supreme Court mid-week resulting in the tie-up completing before Friday.

As part of the merger, Jervois raised $16.5 million to advance its various assets including the now renamed Idaho Cobalt Operation in the US and various cobalt-copper and nickel deposits in east Africa.

Three directors participated in the placement buying up a combined $2.2 million worth of shares.

The newly combined company said the Idaho Cobalt Operation represented its best opportunity to transition from developer to producer and the company would “aggressively” pursue this avenue.

Bod Australia (ASX: BDA)

Health company Bod Australia saw significant growth in medical prescriptions for its 5% CBD MediCabilis product.

Bod filled 161 prescriptions for its MediCabilis product in July alone, having previous only filled 55 order from the beginning of the year.

The pharmaceutical grade cannabis extract will be used in a 12 month trial for sufferers of PTSD.

Last week the company struck an agreement with investment fund NewH2, owned by Hong Kong-listed Health & Happiness Group (H&H).

Under the deal, NewH2 will make $5.5 million strategic investment in Bod – effectively giving NewH2 a 17.64% stake and the ability to appoint two directors to Bod’s board.

DroneShield (ASX: DRO)

Another company with a big week was DroneShield which revealed it had teamed up with Altitude Angel to enhance airspace security world-wide.

The companies will combine their respective technologies to create an integrated product that will be offered to governments and airport operators to boost security and airspace management.

Earlier in the week, DroneShield revealed it had been selected to take part in a grant-based collaboration with the NSW Government to produce real-time drone-detection technology with the first products to be available early next year.

Meanwhile, on Thursday, DroneShield announced another partnership, this time with Bosch. The duo will integrate DroneShield’s products with Bosch’s video surveillance technologies.

Impression Healthcare (ASX: IHL)

Impression Healthcare has appointed Dr Sud Agarwal to its board as a non-executive director, with Dr Agarwal to also take up the chief medical officer position.

According to Impression, Dr Agarwal is considered to be “one of the most influential people in the medicinal cannabis sector”,

Dr Agarwal is currently chief executive officer of Cannvalate, which is planning an ASX listing later this year.

In his role with Impression, Dr Agarwal will lead a formal board to advise on current and future clinical trial programs, as well as commercialisation strategies and assist with shoring up IP.

SciDev (ASX: SDV)

Chemical technology company SciDev has received its first major order in the US oil and gas sector for its friction reducers.

The company said it is starting to reap the rewards of its efforts to break into the US market with more than $1 million in orders placed for delivery in August and September.

SciDev expects the orders will continue to grow with these latest friction reducers destined for the Permian Basin – one of the world’s most productive oil basins.

The company has developed its OptiFlox technology to reduce friction for both proppant and oil hydraulic transport.

Meteoric Resources (ASX: MEI)

Meteoric Resources has begun drilling at its recently acquired Juruena gold project in Brazil.

The maiden program will involve 26-holes for 4,700m and is scheduled to be completed within three months.

The high-grade Dona Maria deposit will be the first drill target with previous exploration at the deposit returning 10m at 101.1g/t gold from 127m, including 2.4m at 389g/t gold and 8m at 62.4g/t gold from 100m, including 3m at 162g/t gold.

Drilling will also target the Querosene and Crentes deposits along with the newly defined prospects Mauru, Tomate and Uilliam.

The week ahead

Other than the first of the quarterly profit reports, the big thing to look out for this week are Australia’s inflation numbers which expected on Wednesday.

In the US, the US Federal Reserve rate decision will have a big influence on markets everywhere, with the expectation that it will cut official rates by 0.25% despite the US economy being in a reasonable shape.

Other figures to watch for include building approvals, CoreLogic home prices for July and retail trade figures.

This week’s top stocks

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.