The broker wrap: risk aversion rules stocks

Founder of FNArena
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What’s Hot? Risk Aversion. What’s not? Risk. The past week saw the eight brokers in the FNArena database downgrade recommendations on 16 stocks while lifting only three. Total Buy ratings now stand at 56.6%, down from 57.1% last week.

Among the upgrades was ANZ Banking Group (ANZ), BA Merrill Lynch upgrading it to a Buy from Neutral on both valuation grounds and expectations Asia will provide solid growth opportunities for the bank. ANZ is now the broker’s top pick in the sector.

A full review of Cochlear’s (COH) prospects sees Macquarie upgrade it to an Outperform from Neutral despite cuts to earnings estimates and its price target to reflect manufacturing issues, supply constraints and product recalls. The upgrade is a valuation call, Macquarie seeing the stock as attractive at current levels given recent share price weakness.

Investa Office (IOF) was the only play to receive two upgrades, both JP Morgan and Deutsche Bank lifting ratings to Buy from Hold. For JP Morgan, the call is valuation inspired after recent relative underperformance, while Deutsche sees reduced execution risk and some growth prospects following offshore asset sales and a share buyback. The upgrades follow a similar move the previous week by UBS.

On the downgrade side, Amcor (AMC) saw a cut to a Neutral rating by Citi given the current share price represents a premium on the broker’s numbers. Citi made a similar change with respect to Ansell (ANN), again on the basis the current share price is a stretch relative to valuation even allowing for the possibility its current earnings guidance might turn out to be conservative.

APA (APA) has made an offer for Hastings Diversified (HDF) and this has prompted both Citi and BA-ML to downgrade ratings, the former to Neutral and the latter to Underperform. While the associated sale of AllGas is viewed positively, the possibility a higher offer may be needed and some valuation concerns post recent share price gains is enough to see both brokers adopt more conservative views.

Commonwealth Property Office (CPA) has enjoyed some gains of late and this has created some valuation issues for both Credit Suisse and JP Morgan. The former has moved to Underperform and the latter to Neutral as both now see better value elsewhere in the sector.

A review by Deutsche Bank left the broker with the view competition is increasing in some of CSL’s (CSL) markets, a concern that was enough for the broker to downgrade it to Hold. The downgrade also reflects recent share price outperformance.

JB Hi-Fi (JBH) surprised the market on Thursday by cutting its earnings guidance, citing ongoing price deflation and tough competition. Brokers have responded by cutting earnings estimates and price targets, with Citi, JP Morgan and UBS all downgrading ratings as well. JP Morgan moves to Underweight, the other two brokers to Neutral recommendations.

Valuation has been the driver of Credit Suisse’s downgrade on Mirvac (MGR) to Neutral, the broker similarly cutting its rating on Stockland (SGP) to Underperform following recent share price movements.

As brokers continue to adjust numbers for Telecom New Zealand (TEL) to account for the recent de-merger, RBS has gone a step further and downgraded it to a Sell, this reflecting recent relative outperformance post the de-merger.

An asset tour saw UBS adjust numbers for Wesfarmers (WES) and downgrade it to Neutral on valuation grounds.

A similar review of prospects for Ten Network (TEN) saw Deutsche downgrade it to a Sell based on increased overall risk and volatility for earnings in the shorter-term.

Note: FNArena monitors eight leading stockbrokers on a daily basis. The eight experts are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, RBS and UBS.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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