Data#3, Articore and MyState show why fundamentals and outlook matter

Last week was the big one for big caps. Now it is all about ASX small caps.

Today brings a deluge of small-cap results for the year to 30 June, just before the reporting deadline.

Why do so many smaller companies report late in the season? In many cases, it is simply about resources. Auditors move on to smaller companies after finishing with their big-cap clients.

What we have seen so far is that it has often been better to travel than to arrive. Share prices have run ahead of results and even solid numbers have not always been enough to satisfy investors. Outlook matters.

Mining stocks have been the standouts

I am glad Under the Radar Report focuses so much attention on mining stocks.

Mining has been the standout this results season.

Mining results themselves are rarely a revelation. It is no secret that commodity prices have been rising to differing degrees. The world is in love with copper and gold, while improving sentiment is also benefiting many lithium and uranium stocks.

Commodity prices, however, are only part of the equation. Every mining company is affected by its own fundamentals. Investors also need a robust operating business, which generally means reliable production and a low unit cost of production.

For industrial companies, the results matter more

Results are particularly important in the industrial space. Overall, we are seeing good numbers, but less certainty about the outlook.

The past six months have included the US-Iran war and the so-called software apocalypse. Both have created major challenges for companies and investors. Analysts need time to work out what is really happening beyond what management says in a results presentation.

This is why quality matters.

Three stocks on our radar: DTL, ATG and MYS

Data#3 (ASX: DTL) is a high-quality stock that has performed very well for Under the Radar Report subscribers over the past decade. Its shares have rebounded from recent lows caused by the software sell-off.

At the riskier end of the spectrum is marketplace operator Articore (ASX: ATG), which we have covered for the past couple of years. Its shares spiked 50% following its result.

MyState (ASX:MYS) is a regional bank, but it is bucking the broader trend. Home lending growth is declining across much of the banking system, while MyState continues to grow and offers one of the sector’s higher forecast dividend yields. Its forecast yield of 5.5% compares with 3.4% for Commonwealth Bank.

These companies operate in very different industries, but each illustrates why investors must look beyond a headline profit number. Ready to actively invest? Join Today.

What does quality look like?

The traditional measures of quality are the holy trinity of a strong balance sheet, cash flow and profit and loss statement.

Even more important is the customer base. Investors should consider:

• How diversified are the company’s customers?
• How exposed are they to economic and geopolitical events?
• Is the customer base growing or shrinking?
• How valuable and durable are those relationships?

You can never spend too much time improving your understanding of a company and its customers.

Uncertainty creates opportunity

Uncertainty over costs and the Middle East conflict has encouraged investors to shoot first and ask questions later. That reaction is understandable, but quality companies can be overlooked during periods of panic.

Our job is to look through the market reaction and search for fresh opportunities. That means understanding the individual fundamentals, judging the outlook and recognising when a quality company has been unfairly marked down.

Results season is not just about what a company earned last year. What matters most is the quality of the business and what comes next.