Brokers downgrade 3 ASX shares: Should you avoid them?

When brokers upgrade or downgrade shares it can have a big effect on its price performance. As Freelancer Ltd (ASX: FLN) shareholders will be aware, an upgrade can send a share price skyrocketing.

Its share price has now climbed by almost 20% since Swiss financial services giant UBS placed a buy rating on it on Monday. Conversely, the opposite can happen when a broker downgrades a share.

Whilst share prices may not always drop, the negative sentiment can put investors off and keep them from investing. This can lead to it underperforming the market and holding your portfolio back. For this reason, I think it is prudent to stay up to date with current market sentiment for shares on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

According to data provided by CommSec, three notable downgrades which investors should be aware of are as follows:

Bank of Queensland Limited (ASX: BOQ)

The regional bank was downgraded to a moderate sell on Monday after brokers started to reflect on the company’s disappointing interim results. Although the Bank of Queensland delivered a good $179 million cash profit, this fell short of the consensus forecast of $186 million cash profit.

This result means the shares are priced at 12x earnings now. Making them the second most expensive in the banking sector, behind Commonwealth Bank of Australia (ASX: CBA).

At this level I don’t see a great deal of upside ahead for the shares, so would avoid starting an investment in the company today.

Nine Entertainment Co Holdings Ltd (ASX: NEC)

The struggling media company has lost 41% of its market value so far in 2016, but still can’t catch a break from brokers. Its shares have been downgraded to a hold rating this week.

Shares which have a hold rating placed on them are generally expected to perform with the market or at the same pace as its peers. Considering the weakness in the industry as a whole, I wouldn’t be expecting huge gains ahead for Nine Entertainment.

I believe investors looking for exposure to the media industry should avoid Nine Entertainment and consider taking a look at the fantastic oOh!Media Ltd (ASX: OML).

Santos Ltd (ASX: STO)

Despite the rally in commodity prices Santos shares have been downgraded to a moderate sell by brokers. I believe many brokers are concerned by the huge amount of debt the company has on its balance sheet.

As per its annual report, the company had a net debt position of $6.5 billion. If commodity prices were to crash again then Santos could find itself in all sorts of trouble.

But this downgrade certainly hasn’t affected the company’s performance this week, with the share price putting on a gain of almost 9% so far.

Personally, I would avoid Santos as it is just too risky for my liking. Instead I would look at one of these three blue chip shares which are lower risk investments and could be about to soar.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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