Reporting season – Volatility driving growth opportunities

In a recent episode of First Sentier Investors' Curious Podcast, David Wilson, Deputy Head of Australian Equities Growth, discusses the significant volatility observed during the February 2025 interim reporting season. He highlights specific opportunities arising from market volatility including those emerging from short-term market reactions and discusses where normally useful valuation metrics like the price-to-earnings ratio might mislead investors. Wilson’s insights underscore the importance of looking beyond short-term market reactions and focusing on the fundamental strengths and growth potential of quality companies.

Listen to the full podcast here

“If I had to describe the most recent reporting season in one word, that word would be volatile”, said David Wilson, Deputy Head of Australian Equities Growth, on the latest episode of First Sentier Investors’ Curious Podcast.

Investors faced one of the most volatile February reporting seasons in many years, marked by numerous outsized share price movements. However, Wilson acknowledged that company results broadly produced more earnings ‘beats’ than ‘misses,’ with companies generally exhibiting resilience through robust cost control management, supporting better margins while navigating the challenges posed by higher interest rates and cost-of-living pressures.

Despite this, the delivery of a strong interim result did not necessarily translate to positive share price performance and instead there was a notable rotation towards companies that delivered results ‘better than feared’, with some of the strongest market performers being among the most shorted stocks. Conversely, there was a shift away from long-duration companies that had delivered stronger performance over the past few years.

“I think there's a lack of liquidity at times in the market. You've also got a group of investors who are trading on a short-term basis and try and position themselves into particular results. So, some of the volatility was driven by liquidity moves and market moves rather than fundamentals,” Wilson highlighted.

“But of course, that creates opportunities for investors like ourselves”.

An opportunity Wilson pointed to was the market's negative reaction to ResMed, a medical device maker, following some disappointing commentary regarding its short-term margin outlook which caused the share price to shift lower despite a solid earnings result.

“ResMed made a comment about next quarter's earnings, and because of some of the short-term focus that sits in the market, the market reacted negatively, and so the ResMed share price fell five to eight percent”*

Wilson explained “We saw that as an opportunity because we think ResMed still very much has a longer-term double-digit earnings growth in place. You've got their devices in the US continuing to grow double digit and their Masks business, in fact - all their products are growing at that sort of rate.”

Another example of where investors may misunderstand an investment opportunity is by fixating on high valuations such as a high one year forward price-to-earnings ratio. Wilson pointed to Pro Medicus, a radiology IT software provider, as an example.

“When you look at something like a price to earnings ratio for a stock such as Pro Medicus, it's actually not that helpful. The reason is because you need to look at Pro Medicus’ longer-term perspective with what the stock can do, how its earnings and sales and revenues can grow over a longer period of time.

“Recently, in this reporting season Pro Medicus announced a new contract with a large hospital group in Florida. So, it's these opportunities that continue to accrue to Pro Medicus that support what looks like a prima facie high PE.”

Wilson highlighted what Pro Medicus and ResMed both have in common – they are quality global leaders in their respective industries, benefiting from structural growth and generating productivity for their clients. It is these types of companies that can ‘run their own race’ irrespective of market conditions that have the ability to deliver long term returns for investors.

^*ResMed’s share price dropped 7.6% during February 2025.