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When 'outperforms' replace 'buy' recommendations it may be time for concern

26 Jul 2021 1 month(s) ago

Some subtle signs that brokers are starting to worry about the stock market's prospects.

You can always tell when brokers are getting a little toey. They start issuing 'outperform' recommendations rather than 'buy' recommendations. They dislike giving 'sell' recommedations because if they are wrong they look bad. So 'neutral' is usually about as bad as it gets for the most part.

Things have been pretty good on the ASX for the last 11 months, somewhat surprisingly given the covid lockdowns. But the optimism may be waning. Macquarie is starting to think that the good times may be easing, asking is this: “As good as it gets for the best upgrade cycle in years?”

Macquarie expects the earnings per share upgrades to continue, which it describes as “the best in decades” and into its 11th month. “The key drivers were banks and resources; but both are cyclicals, and the cycle is slowing. Results for 2H21 should beat expectations, but this makes for a tougher comp for FY22.”

Macquarie says a good strategy is to “buy the dips in COVID losers”. “While the impact is likely to be milder than CY20, lockdowns are an earnings headwind for stocks negatively impacted by restrictions.

“Coupled with uncertainty over the duration of lockdowns, it’s reasonable to expect impacted companies to temper outlook comments. A miss on results could also cause a sell-off in these stocks, but we would buy the dips in re-opening plays, as they offer growth within a slowing cycle.”

Macquaries suggests favouring defensive stocks and look for growth and capital returns (share price rises rather than dividends). Here are some of their tips:

  • Buy Ampol for capital management this result, and upcoming results.
  • Amcor is an attractive defensive... and one that’s not expensive. The initial earnings per share guide is expected to be +5-10%, but this could be upgraded over FY22. Rating: Outperform, target price: A$16.56.
  • Positive on Afterpay after competition concerns caused a correction. APT’s merchant network is key to the investment case, not just the ability to buy now, pay later.
  • Buy Bluescope for FY22 EPS upgrades plus the strong balance sheet. Outperform, target price: A$25.40
  • Brambles to guide to +5-7% profit growth in FY22, plus buybacks to drive. Outperform, target price: A$12.30
  • Brambles is another low growth defensive, with buybacks to support the share price.
  • Coles is cheap relative to WOW and should have benefited from unwind

     of ‘local shopping’ trends in much of 2H21. Outperform, target price: A$17.30.

  • Dominos valuation is high given earnings headwinds.
  • Resmed will benefit from competitor recall.

Other recommendations:

BHP Group: Outperform, target price: A$60.00

Fortescue Metals Group: Outperform, target price: A$27.00

Seek Outperform, target price: A$40.00

Transurban Group: Outperform, target price: A$15.20

Woolworths Group: Neutral, target price: A$38.50


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