Stocks with the potential to surprise this reporting season

Look for healthcare and industrials to outperform this reporting season.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published July 10, 2013 8:19 am AEST

Macquarie's Equities Research team recently released a note summarising which stocks it believes have the potential to deliver a dividend surprise during this reporting season. The reporting season, which officially kicks off this week, is expected to favour industrial and consumer stocks, while those exposed to the mining and IT industries are most likely to surprise to the downside.

Macquarie's research noted that since 2010, in the two months following a dividend surprise to the upside or downside, stocks averaged returns of +2.5% and -1.5% respectively. After four months, on average those providing an upside dividend surprise rose around 6%, compared to a fall of the same magnitude for underperforming stocks.

Companies exposed to slowing mining investment, which have reported profit downgrades in recent months are expected by Macquarie to fare the worst. Examples of these are camp infrastructure provider Fleetwood (ASX: FWD), gold miners Kingsgate Consolidated (ASX: KCN) and Newcrest (ASX: NCM), and mining services firm Monadelphous Group (ASX: MND).

The reduction in cash flow may limit the ability for the companies to continue 'boom-time' dividend payments. Similarly, companies affected by the cyclical slowdown in the IT industry, such as SMS Management Technologies (ASX: SMX) may be unable to maintain dividend payouts on sharply lower revenue. Brokers have suggested a 30% decrease in reported revenue is possible for SMX.

Conversely, industrials exposed to a weaker Australian Dollar, and financial groups exposed to strong equity markets over the previous year may surprise to the upside. Examples of these include healthcare providers Redmed (ASX: RMD) and Sirtex Medical (ASX: SRX), and finance group Platinum Asset Management (ASX: PTM).

Foolish takeaway

Foolish investors will be aware of the stellar performance of high dividend paying stocks in the past 12 months. It is likely that stocks with faster growing dividends will continue to outperform the market in the medium term as more investors search for safe, high yielding stocks during periods of low interest rates. This earnings season will give investors an insight into which sectors of the economy are performing well, and just how much damage has been done to companies exposed to the mining and IT sectors.

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Motley Fool contributor Andrew Mudie owns shares in Kingsgate.

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