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Why Costa Group Holdings Ltd (ASX:CGC) shares are storming higher today

One of the best performers on the market so far on Wednesday has been the Costa Group Holdings Ltd (ASX: CGC) share price.

In morning trade the horticulture company’s shares are up 7% to $7.00.

Why are Costa Group’s shares storming higher?

With no news out of Costa Group today, the catalyst for this share price gain is likely to have been a broker note out of UBS.

According to the note, the broker has upgraded Costa Group’s shares to a buy rating from neutral with a price target of $8.20. This price target implies potential upside of approximately 17% even after today’s gain.

UBS made the move largely on valuation grounds after a meaningful pullback in the Costa Group share price since its disappointing earnings release last month.

In addition to this, the broker feels that stronger wholesale produce pricing and the company’s medium term growth projects are reasons to be bullish. These growth plans include its Australian Berry and Mushroom expansions, its Avocado vertical integration, and international growth projects.

Looking at the year ahead, its analysts believe the company could beat its FY 2019 low double-digit profit growth guidance, though this will be reliant on a strong second half performance.

Should you invest?

I would have to agree with UBS on Costa Group. Its shares have always been a little expensive for my liking, but this post-earnings pullback has brought them down to an attractive level now.

Based on UBS’ forecast for earnings per share of 27 cents in FY 2019, Costa Group’s shares are changing hands at 26x forward earnings. While this is not necessarily cheap, I believe its medium term growth prospects justify the premium.

As a result, I would put it up there with Bellamy’s Australia Ltd (ASX: BAL) and Freedom Foods Group Ltd (ASX: FNP) as a food share to consider.

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Returns as of 6th October 2020

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. The Motley Fool Australia has recommended Freedom Foods Group 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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