Earnings Season Will Keep Dip Buyers Alert

Investors could find buying opportunities in financial services

Sunniva Kolostyak 1 November, 2022 | 11:44AM
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It’s been a busy earnings season so far. US tech stocks like Meta (META) have been battered by the current market environment, and, in the UK, Ocado (OCDO) has started to climb after months in the doldrums. Amid UK political turmoil, meanwhile, the FTSE has crossed below the 7,000 mark several times in the past quarter. Does mean opportunities still exist?

Just because a stock is down significantly, it doesn’t mean that the company is a bad investment. Morningstar’s Star Rating can be a great indicator of whether a stock is overvalued (1 star) or undervalued (5 stars). Moreover, an economic moat rating shows a competitive edge compared to competitors.

So after the recent reporting period and share price dives, what companies could provide investor opportunities?

Moaty FTSE Stocks

Whether share prices are set to rise in the near future will be dependent on a stabilising economy, interest rates and inflation. As such, dividend stocks could be a great way to ensure some medium-term returns.

And all of the moaty FTSE stocks with a 5-star rating pay a dividend – some are even among the best dividend payers, and feature in our monthly list. BT (BT.A) reports later this week (as mentioned in our video) and so does Glaxo (GSK). In October, it was Imperial Brands (IMB) with the highest dividend yield, but within the past week, the stock has moved from 5-star into 4-star territory.

Smith & Nephew (SN.) is also releasing its Q3 earnings this week, and the company just about made it over the 3% dividend yield threshold we set for the month. Meanwhile, Admiral (ADM) is set to report at the end of the month, but so far, its forward dividend remains above 4%.

Who Run the World? Banks...

The biggest banks in the UK have completed their earnings season and, with rising interest rates and borrowing, it’s no surprise that their bottom lines have largely improved.

As we learned last week, Barclays (BARC) and HSBC (HSBA) posted results that were well ahead of forecasts, with Barclays earnings exceeding £2 billion for Q3; both cited a boost from higher borrowing rates.

Narrow-moat HSBC is currently looking like a bargain in the eyes of Morningstar’s analysts, and is expected to meet its return on tangible equity target of 12% by 2023.

Michael Wu, senior equity analyst, believes the bank’s share price will remain low until there is clarity on peak inflation and interest rates, particularly in the United Kingdom. But, a share buyback in the second half of 2023 may serve as a positive catalyst, he says.

Another bargain is Lloyds (LLOY), which did see profits drop by a quarter over the past three months. But, it reassured investors that it still beat expectations, with increased provisions made for defaults on loans and mortgages.

Morningstar’s equity analyst Niklas Kammer adds that the tailwinds of higher interest rates are outweighing headwinds like a growing uncertainty around the UK economy.

"This is in line with our thesis for Lloyds, which we expect to disproportionately benefit from the higher rate environment compared with the strain expected from a weakening economy. We maintain our fair value estimate of GBX 77 per share," he says.

Despite this, banks have been criticised for increasing borrowing costs while not passing on interest rates to savers. As such, it’s not a surprise that Bank of England data now suggests high rates are driving a slowdown in mortgage demand.

Bank bosses have also rebuffed the discussion around windfall taxes, with HSBC pointing out that the sector pays more tax than other large companies.

NatWest (NWG) was last bank to report, reporting strong growth as well – but the share price still fell after the announcement. However, neither NatWest nor Barclays have economic moat ratings.

No-Moat Bargains

And speaking of no moats, Shell (SHEL) and Centrica (CNA) have done well too, unsurprisingly, given energy prices this year. Despite this, both companies are still undervalued, with a 4- and 5-star rating respectively. Shell reported third-quarter results that surpassed market expectations: adjusted earnings soared to $9.5 billion from $4.1 billion a year ago.

Why should you select a cheap dividend stock? A 5-star rating means that, after careful analysis, Morningstar believes a company has the potential to improve over time.

Plus, pursuing stocks that produce a regular dividend can be a strategy that helps investors navigate volatility and diversify risk, according to Nick Clay, head of global equity income at Redwheel. Re-investing dividends also allow for compounding, particularly relevant in turbulent times.

"It means those dividends keep reinvesting even in a falling market, creating a larger investment commitment when the market eventually turns back up," he says.

Which Companies Are Yet to Report?

Whoever’s cheap and expensive could still change based on earnings reports still due. Below are the companies that are set to report this week.

Wednesday, November 2

Aston Martin Lagonda Global Holdings PLC - Q3 Results

Coca-Cola Europacific Partners PLC - Q3 Results

Greatland Gold PLC - Full Year Results

GSK PLC - Q3 Results

Hiscox Ltd - Trading Statement

Metro Bank PLC - Trading Statement

Morgan Sindall Group PLC - Trading Statement

Next PLC - Q3 Results

Polymetal International PLC - Q3 Results

Smurfit Kappa Group PLC - Trading Statement

Weir Group PLC - Q3 Results

Wizz Air Holdings PLC - Half Year Results

Thursday, November 3

BT Group PLC - Half Year Results

Gattaca PLC - Full Year Results

Helios Towers PLC - Q3 Results

Hikma Pharmaceuticals PLC - Trading Statement

Howden Joinery Group PLC - Trading Statement

J Sainsbury PLC - Half Year Results

Lancashire Holdings Ltd - Trading Statement

OSB Group PLC - Trading Statement

Polymetal International PLC - Q3 Results

RS Group PLC - Half Year Results

Rolls-Royce Holdings PLC - Trading Statement

Smith & Nephew PLC - Trading Statement

TI Fluid Systems PLC - Trading Statement

Trainline PLC - Half Year Results

UP Global Sourcing Holdings PLC - Full Year Results

WAG Payment Solutions PLC - Trading Statement

Wizz Air Holdings PLC - Half Year Results

Wheaton Precious Metals Corp - Q3 Results

Woolworths Group Ltd - Q1 Results

Friday, November 4

Apax Global Alpha Ltd - Full Year Results

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Sunniva Kolostyak

Sunniva Kolostyak  is data journalist for Morningstar.co.uk

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