Australian Investment Blog

Volatility Surges in "highly priced" stocks during reporting season

Yesterday saw significant volatility from 3 local stocks that are currently valued at significant premiums to the market. All 3 names plunged in early trading which was then followed by different degrees of recovery. As we have mentioned recently stocks that are "priced for perfection" are going to struggle to satisfy the market when they report. This is the opposite to the banking style stocks which recently have surged after average style reports e.g. ANZ, BEN and SUN - of course, the big test is CBA today

Two stocks in question Carsales.com (CAR) and REA Group (REA) have interestingly experienced very similar outcomes over the last 2 years with them falling 8.7% / 3.8% for REA and 6.1% / 6.4% for CAR respectively.

1. Carsales.com (CAR) $12.54 - traded between $11.51 and $12.88, over a 10% intraday swing.
2. REA Group (REA) $59.52 - traded between $55.62 and $61.14, over a 9% intraday swing.
3. Cochlear (COH) $125 - traded between $128.41 and $119.81, almost a 7% intraday swing.

Today we will look at these 3 stocks that rode the rollercoaster yesterday and give our opinion on them going forward.

Carsales.com (CAR)

CAR's report was largely in line with market expectations showing solid growth which is required to support its current valuation. The early weakness yesterday appears to be down to the market focusing on news around Carsguide that we believe is not particularly relevant to CAR. The market quickly agreed with us and the stock rallied strongly to close in the black.

Caution is always warranted when a company is trading on a P/e close to 30x. Technically we can remain positive with stops now under $12.
Our "gut feel" is the next 20% move is likely to be down, not up.

Carsales.com (CAR) Monthly Chart

REA Group (REA)

Missed analysts’ expectations yesterday by about 2% but after an aggressive early fall, the stock recovered to close only slightly lower. We believe real estate agents will be the losers going forward, not REA Group on the margin front.

Similar to CAR, REA Group is trading on close to 30x earnings creating significant performance risks. Technically the stock remains bullish with stops under $55.80, but we would also advocate taking profits on any strength towards $70.

REA Group (REA) Quarterly Chart



Cochlear (COH)

Announced profit growth in line with analysts' estimates but thoughts are growth will slow after recent profit strength. The stock closed down 2.8% but significantly above its intraday lows.

Technically COH remains bullish with buy levels currently around $115, similar to REA Group we would advocate taking some profits around $140 and stops should be under $93.

Cochlear (COH) Quarterly Chart



Summary

We advise ongoing caution on stocks that are trading on high valuations, which have been the market darlings of this 8-year bull market, we do not believe they will be the performers over the next 3-6 months.

Our view of the 3 stocks that experienced extreme volatility yesterday are:

1. CAR - Stay long with stops under $12 but our preference is to sell into strength.
2. REA -Stay long with stops under $55.80 and look to take profits up towards $70.
3. COH - Buy around $115, look to take profits around $140 and run stops on longs under $93.

Overnight Market Matters Wrap

• A quiet closing in the US markets, well off session highs, saw the Dow close up 4 points to 18,533, while the S&P500 closed up just under 1 point to 2,182 after the index hit an all-time intraday high.
• Oil lost a little bit of ground last night, with the price settling down 25c (-0.6%) to US$42.77/bbl.
• Gold had a better night, moving higher on a weaker US$. The metal closed up US$5.60 (+0.4%) to US$1,339.00/oz. Analysts said the metal also moved higher after it broke the technical level of US$1,335.
• The ASX 200 is expected to open slightly higher this morning with the September SPI Futures indicating an open of 7 points higher, around the 5,559 level.

Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney NSW 2000


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