Two stocks that have crashed into a bear market have caught the attention of leading brokers who believe the valuation of these stocks makes them too compelling to ignore.
A bear market is defined as a 20% or more peak-to-trough fall and the BlueScope share price and Reliance Worldwide share price fit the bill as the stocks have shed at least that amount in the past three months when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index has shed 8% of its value.
But that’s not the only thing that BlueScope and Reliance have in common. Both stocks have significant exposure to the booming US market and should benefit from a rising US dollar.
These tailwinds aren’t helping sentiment towards the companies – at least not yet.
This could soon change though as Credit Suisse has upgraded its recommendation on Reliance to “outperform” from “neutral”.
A slowing US housing construction market that is weighing on Boral Limited’s (ASX: BLD) share price and James Hardie Industries plc (ASX: JHX) share price is also dragging on sentiment towards Reliance.
It doesn’t help that US DIY retailers like Home Depot and Lowes have also downgraded earnings as Reliance sells its products through those chains.
But the company’s core SharkBite product is not used in new housing construction. The use of the push-to-fit pipe joining product is also non-discretionary and is used to fix leaks and damaged water pipes.
“We upgrade to OUTPERFORM given that Reliance has re-rated approximately in line with peers despite no material deterioration in its core repair and maintenance end market,” said Credit Suisse.
“It now trades at an all-time low P/E [price-earnings], providing an opportunity to enter a company with a demonstrable competitive advantage, good management and a clear long-term growth strategy.”
The broker has a price target of $5.60 a share.
Meanwhile, UBS believes BlueScope is underappreciated and undervalued by the market.
The broker attributes the stock’s weakness to worries about shrinking steel price spreads (the price difference between US steel and the rest of the world), a flat outlook for the company’s FY19 earnings, and some concerns about its exposure to the slowing Australian housing market.
“We agree that the US spread is unsustainable long-term, but we think it could sustain for longer than what is currently priced in, as tariffs appear likely to remain in place,” said UBS.
“We also note that Chinese steel capacity shuts are likely to be broader but similar vs last year. Both are supportive for BSL’s earnings outlook vs what’s priced in.”
The risk posed by Aussie housing is also smaller than what many sceptics believe as any drop in demand from the residential market will be offset by an increase in industrial properties like warehousing.
UBS reiterates its “buy” recommendation on the stock with a $21 a share price target.
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Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited, Boral Limited, and Reliance Worldwide Limited. 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 Scott Phillips.