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Why Costa Group Holdings Ltd (ASX:CGC) shares tumbled lower today

The market may have been pushing notably higher on Tuesday, but the same cannot be said for the Costa Group Holdings Ltd (ASX: CGC) share price.

The horticulture company’s shares were amongst the worst performers on the market with a 3.5% decline to $7.82. At one stage Costa Group’s shares were down by almost 5% before recovering.

Why did Costa Group’s shares tumble lower?

With no news out of the company today, it appears as though a broker note out of UBS has been the catalyst for this decline.

According to the note, the broker has downgraded Costa Group from a buy rating to neutral on valuation grounds. The broker has, however, lifted the price target on the company’s shares to $8.40 from $7.50.

Analysts at the investment bank clearly felt that 27x its FY 2019 earnings forecasts was a little rich and I would have to agree.

Although I am a big fan of Costa Group, I do feel its valuation has got out of control. Historically agricultural shares tend to trade on lower than average multiples, whereas the avocado producer’s shares are priced at similar levels to high growth tech shares like Appen Ltd (ASX: APX) right now.

In addition to this, the broker appears concerned that the positive tailwinds the company has been experiencing this year could lessen next year, which has led to a slight reduction in the broker’s earnings forecasts.

Should you sell your shares?

While taking a little profit off the table could be a good idea after its impressive run, I wouldn’t necessarily be a seller of its shares if I owned them as I think it could be a good long-term investment.

But I wouldn’t be a buyer myself unless there was a meaningful pullback in the near term. At this point I see far more value in sector peers such as Rural Funds Group (ASX: RFF) and would suggest investors consider it ahead of Costa Group.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of Appen Ltd. 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 Scott Phillips.

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