Value lies in big banks, resources

With macro issues in Europe and the United States appearing to be sorted in the short term, the Australian market can once again focus on Australian companies as we lead into the ASX reporting season.

Throughout August, we’ll see a string of full-year profit reports from the top companies on the ASX, led by Rio Tinto on August 4.

After the company profit reports stocks will start to go ex-dividend (ie. trading without their dividends).

So which profit reports are going to be worth following in the coming month?

As always you start with the bellwether of the Australian economy, BHP. Not only does it have the largest market capitalisation on the ASX ($136 billion versus $79 billion for CBA, which holds the number two position) but it will give an update of commodity demand from China.

Closely scrutinised will be any comments chief executive Marius Kloppers makes about guidance going forward, because this will set the scene for the next few months in the resource sector.

BHP is scheduled to report on August 24, however, Rio Tinto’s report three weeks earlier will give the market a preview of the result.

Financial stocks make up about 34 per cent of the ASX by market capitalisation, so all eyes will be on Commonwealth Bank, which has its profit report on August 10.

Again, we will get an early look at the CBA results when NAB releases its quarterly report a day earlier on August 9.

Don’t hold your breath waiting for the NAB, WBC and ANZ profit reports, though, as they work on a September 30 year end and won’t be reporting again until November (after recently reporting in May).

The other stock in the top seven on the ASX via market capitalisation that isn’t a bank or a miner is Telstra, which is always interesting around dividend time because the dividend yield is so attractive on this stock.

Telstra is currently about the $3/share level, which gives it a dividend yield of 9.3 per cent fully franked, which is an effective dividend return of 13.3 per cent after tax implications are considered, almost double the return on a bank term deposit.

Telstra’s profit report is on August 11 and it will be interesting to see what chief executive David Thodey has planned for life after structural separation.

For those looking at underlying market fundamentals, the P/E ratios for the upcoming reporting season are of interest.

The forecast P/E ratio for the ASX 200 Index for financial year 2012 is 10.9, against a historic market average of about 14.

Delving deeper into these numbers, it’s the financials and materials indexes that are at the bottom end of the scale, each with P/E forecasts of 9.9 for 2012.

This tells me the value in the market currently lies in the big four banks and the two resource leaders at current levels, making the reports mentioned above even more interesting.

For more information, contact Cameron Bartram at Sentinel Stockbroking on 9225 0028 or email cbartram@sentinelgroup.com.au

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.