Change in stockbroker ratings in the past week
Having assessed the outlook for Australian equities relative to bonds, Goldman Sachs argues equity prices are currently discounting unrealistically low growth rates into the future; valuations remain attractive across equities as determined by a number of valuation metrics and annualised four-year returns are currently cycling the worst period for equities since the early to mid-1970s.
This leads Goldman Sachs to suggest the prospects for future returns in equities relative to bonds are as good as they have been for many years (echoing similar sentiment as expressed by colleagues in Europe). Favoured stocks are those with low earnings volatility given strong operational strategies. Goldman Sachs also recommends investors increase their US dollar exposure across portfolios.
Meanwhile, downgrades to stock broker ratings for individual stocks continue, far outweighing upgrades. The eight brokers in the FNArena database lifted recommendations on just four companies (and only one of these was a Buy) while downgrading 24 stocks. Total Buy ratings now stand at just 50.56%, the lowest level for some time, despite the share market effectively moving sideways.
Upgrades
Among the upgrades was Aurora Oil and Gas (AUT), where JP Morgan lifted its rating to Neutral. The change brought it into line with UBS and Credit Suisse, which downgraded the stock to Neutral following its full-year earnings, but JP Morgan factored in its findings from a recent site visit and lifted its valuation and price target.
OM Holdings (OMH) was upgraded to Neutral by RBS Australia – a valuation call as downside risks to earnings from lower manganese prices now appears priced into the stock following a share price fall of around 70% over the past year.
Deutsche Bank upgraded Oz Minerals (OZL) to Buy following changes to commodity price and foreign exchange assumptions. The changes meant a trimming in price target, but the broker sees improved value at current levels.
The final upgrade of the week was Telstra (TLS), where BA Merrill Lynch lifted its rating to Neutral. There is increased scope for capital management and a more stable earnings outlook in general in the broker’s view, which justifies the upgrade.
Downgrades
Among the 24 downgrades was Aurora, which was not the only stock where ratings were lowered by more than one broker; Leighton Holdings (LEI), QBE Insurance (QBE) and Transfield Services (TSE) also received multiple downgrades.
Both Deutsche Bank and Macquarie moved to Sell ratings on Leighton given credibility issues arising from further write-downs to problem contracts. The other issues according to Deutsche include the potential for balance sheet issues and a weak medium-term growth outlook.
Valuation was behind downgrades to QBE, with both Citi and JP Morgan cutting it to Neutral on the back of recent share price strength. The insurer’s annual general meeting this week showed earnings drivers for the company have turned more positive in recent months. With respect to Transfield, the downgrades from JP Morgan, RBS Australia and Macquarie reflect concerns over problem contracts that go beyond April’s profit warning.
Elsewhere, Macquarie downgraded Boral (BLD) to Neutral as earnings revisions meant a cut in its price target, while UBS moved to Neutral on CSL (CSL) on valuation grounds after factoring in some changes to forex assumptions.
The changes to forecasts that saw Deutsche upgrade Oz Minerals have also seen the broker downgrade Fortescue (FMG), Iluka (ILU), Paladin (PDN) and Sandfire (SFR), as revised earnings estimates have impacted on total return expectations.
While OrotonGroup (ORL) remains a retail favourite of Credit Suisse, the broker has downgraded it to Neutral on valuation grounds. Primary Health Care (PRY) has similarly been downgraded by the broker. Valuation has also been behind RBS Australia downgrading of Pharmaxis (PXS) to Hold, while JP Morgan downgraded Qantas (QAN) to Neutral given the in-house view that consensus earnings estimates for the airline remain too high.
A stretched valuation and some concerns over domestic ad volumes have seen BA-ML downgrade Seek (SEK) to Sell, while recent share price gains caused Citi to downgrade Sonic Health (SHL) to Neutral. The risk of earnings and sentiment downside from current levels has prompted UBS to move to a Neutral rating on Virgin Australia (VAH), while Macquarie cut Westfield Group (WDC) to Sell as the group’s shopping mall property assets business repositioning is expected to take some time.
Change in earnings forecast (EF), earnings per share
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.
Also in the Switzer Super Report
- Peter Switzer: Should we sell up now? [1]
- Lance Lai: Chart of the week: accumulate Telstra on the dips [2]
- Paul Rickard: How to invest overseas [3]
- Tony Negline: Three foolish SMSFs and their punishments [4]