The violent October sell-off has left many investors licking their wounds as macro-economic risks, geo-political tensions and disappointing profit news sent a number of large cap ASX stocks to the doghouse.
The S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index shed just over 6% of its value last month, making October the worst month since August 2015.
But some of these dogs deserve a second chance, according to top brokers, and three stand out.
The first is embattled building materials supplier CSR Limited (ASX: CSR). CSR shares collapsed to a more than two-year low last month following its poor half-year profit results that were largely driven by weakness in its aluminium and property divisions.
However, Macquarie Group Ltd (ASX: MQG) thinks investors should use the dip to load up on the stock and the broker is sticking to its “outperform” recommendation even as it cut its price target on the stock to $4.40 per share from $5.75.
“Top-line outcomes beat our expectations by 4%, with beats across each segment, driven mainly by Building Products,” said the broker.
“CSR’s balance sheet remains strong, with deferred settlement of property transactions and declining capex driving a return to a net cash position in FY20. The possibility of a sale of Viridian (among other options) could add to balance sheet strength and bring increased capital management potential.”
The latest favourite hedge fund shorting target Corporate Travel Management Ltd (ASX: CTD) is another dog worth backing, according to Morgan Stanley.
Corporate Travel’s share price is testing its one-year low on concerns that there are multiple holes in the business model of the business travel management company.
Morgan Stanley believes management can do a better job communicating with the market and being more transparent on how it books revenue, its network of global offices and patents, but believes there is nothing sinister that would warrant it downgrading the stock.
If anything, investors should feel comforted that Corporate Travel has generated significant cash since its initial public offer that exceeds the capital raised.
The broker reiterated its “overweight” recommendation on the stock although it has lowered its price target to $27 a share from $35 a share.
The final dog worth backing amid the brutal sell-down is jewellery retailer Lovisa Holdings Ltd (ASX: LOV).
The Lovisa share price has been whipped by the market following its disappointing trading update by Morgans (not to be confused with Morgan Stanley). The broker has used the drop in the share price as an opportunity to add Lovisa to its “conviction buy” list.
“LFL [like-for-like] sales volatility/weakness is likely to persist over the balance of FY19, however, we are more focused on LOV’s store rollout potential as the group’s key driver,” said the broker.
“We are attracted to LOV’s business model and quick store payback, less Amazon risk and potential for large-scale global rollout.”
Morgans has a target price of $8.06 on the stock.
But buying beaten-down shares is a risky endeavour. While strong arguments can be made about their attractive valuations, a lack of nearer-term catalysts could leave their share prices depressed for some time.
You also shouldn’t forget the market maxim that profit downgrades come in threes when it comes to de-rated stocks that have issued bad profit outlooks.
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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management 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.