In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business.
Brambles (TWE) – Current Price $10.62 – Has downgraded its profit forecast which wiped $3.1bn off the market capitalisation of the company this week. Shares fell 16%. The company now expects revenue growth of 5% in the six months ended December 31 and underlying profit growth of approximately 3%. FY results will fall below revenue guidance range of 7%-9% and underlying profit range of 9%-11%.
Broker View: Morgan Stanley (OVERWEIGHT $12.30) – The broker believes the 16% share price sell-off is a massive overreaction given strength of BXB’s growth outlook. It’s all short term stuff in the broker’s eyes rather than something more cynical. A PE of 17x is below its five-year average of 18.5x. This makes the stock a strong buying opportunity with the company expected to post a solid 2H.
Unconventional View: We disagree with the broker report titled ‘Overreaction brings opportunity’. The recent share price fall is justified and we think there is more to come. Brambles has slashed its profit forecasts because of a sharp drop-off in demand in its US pallets business in December. This has dented investor confidence and put the company on a back foot. What once was a defensive safe stock is now on the nose. The moment a high PE stock is unable to deliver, the market tends to lose interest very quickly and offload the stock. ROE isn’t looking too flash either. Forecasts are for its ROE to fall in the years ahead, with profitability falling. We suggest investors do the same. BXB is facing higher costs as US retailers either delay buying new stock or lower the amount of stock ordered which means pallets are being returned. It could be that the election of Trump has caused a shift in consumer behaviour. On the chart, BXB has broken its long running uptrend support. This is a bearish sell signal. Until a bottom is formed, we don’t recommend investors buy just yet. But there will be an opportune time when you’ll be able to pick this stock up at a rock bottom price. But not yet. The share price could have further to fall.
Bluescope Steel (BSL) – Current Price $11.06 – Shares have been on a tear up 8% this week and up nearly 40% over the last 3 months. The recent rise comes on the back of a profit upgrade driven by strong steel prices, tax breaks and pay freezes. This has led the company to forecast a profit of $600m for the December half above the November forecast of $510m.
Broker View: Cit (BUY $13.34) – The broker is positive on Bluescope’s outlook following this profit upgrade. The good news keeps rolling says the broker with analysts pointing out that BSL remains a quality stock with low financial leverage. All in all, the company is on track to bust past the $1bn EBIT mark this financial year.
Unconventional View: We agree with Citi. The profit upgrade is a positive announcement and readies the market for asolid result when it reports soon. The profit upgrade comes on the back of a massive surge in steel prices. Despite a massive run in the share price, we think there is still more to go. Momentum is bullish and the valuation is compelling. Macquarie even says the stock is at a discount to global peer basis. BSL is however a traders stock. It has run hard and on the RSI it’s looking a touch toppy. But that’s ok. It’s trading with bullish momentum and making higher highs. If you’re tempted to buy it, set a tight rolling stop loss in the event that it pulls back.
ResMed (RMD) – Current Price $9.13 – This week posted a 17% rise in 2Q revenue to US$530.4m. Whilst the result came in better than expected it was the company’s approach to the Trump administration that grabbed market attention. RMD says it’s ready to adapt to new US policies.
Broker View: Credit Suisse (BUY $9.45) – The broker has released a positive note on the company post its results. Earnings were above consensus forecasts and show a recovery in organic earnings growth. Potential catalysts include launch of the AirFit P20 mask and resolution of AirFit F20/N20 mask supply constraints.
Unconventional View: We agree with Credit Suisse. This week’s profit result was a big beat on consensus forecasts which only further highlights a great set of numbers. But the main takeaway was the company’s upbeat assessment of the Trump administration and willingness to adapt to any policies. As new policies begin to be introduced, the company is prepared and wanting to be ahead of the curve. This means the good times are set to continue. RMD has received high demand for its two masks AirFit F20 and AirFit N20. The successful launch of these two products will help it stay a step ahead of its competitor Fisher & Paykel (FPH). On the chart, RMD has broken out on the upside of its uptrend channel. This is bullish buy indicator however shares are up some 10% this week. We suggest waiting for a dip before buying. Overall though the RMD chart is attractive with the stock continuing to push higher.