Our market has been stuck in a relatively tight trading band as investors sit on the sidelines to await the deluge of profit result announcements later this month.
I think the reporting season will be reasonably positive for earnings growth as the macro economic risk factors have yet to really bite, but there's lots of room for the unexpected – both pleasant and unpleasant.
The analysts at Macquarie Group Ltd (ASX: MQG) are trying to uncover the surprises by highlighting stocks where their forecasts differ significantly from consensus to come up with their conviction list of stocks to buy and sell during this period.
Having differing views from the market isn't enough of course. The broker zeros in on stocks where consensus estimates have recently been revised closer to Macquarie's expectations.
"We do not apply this criteria [sic] strictly, but our expectation is that there will, at some point, be a convergence by the consensus towards our earnings view," said Macquarie.
"We are not only confining our window to FY18 forecasts because the result might, in fact, be the catalyst for earnings changes further out in the forecast window."
Using this strategy in the February 2018 reporting season has generated an 86% hit rate in terms of outperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) over the three days after the company hands in its earnings report card.
Stocks that Macquarie has the highest conviction on the "long side" (meaning upside potential) and which are trading below its price target include steel maker BlueScope Steel Limited (ASX: BSL), plumbing products maker Reliance Worldwide Corporation Ltd (ASX: RWC), and engineering and construction group Downer EDI Limited (ASX: DOW).
Macquarie also sees consensus upgrade potential for education services group Idp Education Ltd (ASX: IEL), oil and gas company Beach Energy Ltd (ASX: BPT), auto parts supplier Bapcor Ltd (ASX: BAP) and jewellery retailer Lovisa Holdings Ltd (ASX: LOV), although the share prices of these stocks are trading at or above the broker's 12-month target price.
On the flipside, stocks that the broker believes has the strongest "short side" (downside potential) include hearing device maker Cochlear Limited (ASX: COH), supermarket giant Woolworths Group Ltd (ASX: WOW) and power utility AGL Energy Ltd (ASX: AGL).
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