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Why another top broker just upgraded Primary Health Care Limited (ASX:PRY) to “buy”

The worse of the sell-off in Primary Health Care Limited (ASX: PRY) could be well behind us with the stock bouncing higher today after a second broker upgraded its recommendation on the embattled medical facilities group.

The share price of Primary Health jumped 0.7% to $2.86 in lunch time trade even as the health care sector slumped into the red no thanks to falls in CSL Limited (ASX: CSL), Sonic Healthcare Limited (ASX: SHL) and Cochlear Limited (ASX: COH).

But Primary Health is still down 18% since the start of 2018, when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 2%, although sentiment towards the company is turning even as management warned of a $4.5 million hit to its bottom line from a Fair Work Commission ruling to award more than 600 of its employees a big pay rise.

JP Morgan used the news to upgrade the stock to “overweight” as the ruling clears the uncertainty hanging over the stock.

What this says to me is that Primary Health should have done the right thing in the first place, particularly as management believes it can fully offset the financial impact from a cost reduction program.

The 600 plus workers of Dorevitch (the Victorian subsidiary of Primary Health) have been on strike since August last year as their pay has effectively not been revised since 2007.

Investors can now focus on the positives for the stock including the positive impact from the upcoming federal election, according to JP Morgan.

Opposition leader Bill Shorten promised in 2016 to increase funding to Medicare by around $2.4 billion and the Morrison government is very likely to also make similar gestures as it tries to hang on to power.

“Primary offers the best leverage to the likely multi-billion dollar promises to lift Medicare funding and hence the risk/reward profile over the next 12-months has turned positive,” said JP Morgan, which has a $3.30 price target on the stock.

The upgrade follows Citigroup’s decision last week ago to lift its recommendation on Primary Health to “buy” from “sell” (click here for more details on this).

It’s almost shocking to think, but the positive calls by the brokers means that this underdog may be a better buy than more popular (and more expensive) stocks in the sector like CSL and international hospital operator Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC).

I guess every dog has its day.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd. and Ramsay Health Care Limited. 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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