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Why Orica Ltd (ASX:ORI) and Macquarie Group Ltd (ASX:MQG) share prices are rallying

The Macquarie Group Ltd (ASX: MQG) share price and Orica Ltd (ASX: ORI) share price are defying the broader market sell-off today that has knocked 0.4% off the value of the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index this afternoon.

Macquarie’s share price is up 0.2% at $122.71 while the Orica share price is ahead 1.4% at $17.98 at the time of writing.

The jump in the share prices of the investment bank and explosives and chemicals manufacturer have one thing in common – they both coincide with broker upgrades on both stocks.

Macquarie posted a pleasing first half result and upgraded its full-year earnings guidance on Friday. The interim profit figure was 6% above Ord Minnett’s expectations and the broker upgraded the stock to “accumulate” from “hold” as it boosted its price target by $15 to $132 per share.

“We note this has come much earlier in the year than normal, reflecting confidence in the outlook, and guidance does not yet include the Quadrant Energy sale,” said the broker.

“This strength appears set to continue in the near term and we see a number of gains benefiting the second half.”

Ord Minnett increased its FY19 net profit forecast for Macquarie by 7% to $2.9 billion and that puts the stock on an undemanding price-earnings (P/E) multiple of around 14 times.

That’s cheap given the quality of the business and management’s track record.

Orica’s earnings result from last week has also earned it an upgrade from Credit Suisse. The broker changed its recommendation to “outperform” from “neutral” as it lifted its price target on the stock to $19.08 from $17.60 a share.

No one will blame you if you feel conflicted by the better than expected second-half profit performance from Orica as many will not know whether to take the news as a sign that the group had turned a corner given management’s track record in delivering disappointments.

“Whilst there are several reasons to be cautious, the significant tightening of supply/demand in the Australia Pacific which is being reflected in a sequential improvement in contract outcomes and a significant A$43mn contribution from volume, margin and mix in 2H18 creates an equally strong upside case,” said Credit Suisse.

“Whilst not 100% convinced, we feel that ORI is getting on top of operational issues and that a tightening supply/demand balance will carry profits higher over the medium term.”

However, the broker had to lower its over-bullish near-term profit forecasts for the group and the price target increase comes from a P/E multiple expansion and upgrades to its longer-term forecasts.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group 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.

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