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Top brokers have upgraded these 2 S&P/ASX 200 stocks to “buy”

Our market is clawing back from a weak open today with the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) gaining 0.4% in after lunch trade.

The rebound comes on the back of a strong showing in the Costa Group Holdings Ltd (ASX: CGC) share price and Treasury Wine Estates Ltd (ASX: TWE) share price, but it’s the jump in ARB Corporation Limited’s (ASX: ARB) share price that caught my eye.

Shares in the four-wheel drive accessories group are the second-best performer on the S&P/ASX 200 index at the time of writing as it rallied 4.4% to $17.28.

ARB Corp revs up

ARB Corp’s share price surge coincides with Citigroup upgrading the stock to “buy” from “neutral” as the broker believes the stock has been oversold.

Shares in the company have reversed nearly 30% in the past five months due to a number of factors. This includes the slow release of new ARB products for the updated Toyota Hilux and Ford Ranger trucks, the stronger Thai currency (its factory is located in Thailand) impacting on margins and changes to road regulations.

The change in regulation relates to Gross vehicle mass (GVM) and gross combination mass (GCM) for Australian vehicles with GVM referring to the legal limit a vehicle is allowed to carry and GCM refers to towing capacity.

“Previously, these limits could be upgraded through the installation of higher-spec aftermarket equipment to allow a vehicle to carry more weight and/or tow larger trailers,” said Citi.

“However, recent Federal Government regulation has banned GCM upgrades for new, unregistered vehicles effective 1 July 2018. Further, the Queensland Government has also banned GCM upgrades for in-use vehicles, effectively prohibiting them altogether.”

Nonetheless, the broker doesn’t think the new rules will have much impact on ARB given that GVM upgrades are still allowed on new unregistered vehicles.

The use of caravans is also low in Australia and that gives ARB room to grow this market for its towbars.

Further, GCM upgrades are still permitted in most states, particularly the most populous states of Victoria and New South Wales.

Citi has a $19.58 price target on the stock.

Wesfarmers Ltd (ASX: WES) upgraded to “buy”

Meanwhile, Wesfarmers Ltd’s share price is also enjoying a nice bounce today after Credit Suisse upgraded the stock to “outperform” from “neutral” following the demerger of Coles Group Limited (ASX: COL).

While many believe Wesfarmers has gone ex-growth due to its leverage to the falling housing market through its Bunnings and Kmart businesses, Credit Suisse believes the market is underappreciating the conglomerate’s industrials business.

Even the broker admits it’s a bit of a gutsy call but problems at Orica Ltd‘s (ASX: ORI) ammonium nitrate Burrup plant is creating an opportunity for Wesfarmers at a time when gas prices are easing (which is good for Wesfarmers margins).

“We will go out on a limb and suggest that over the next two years there will be a significant expansion of WES’ ammonia manufacturing,” said the broker.

“Blackwoods earnings will double over five years as it finally gets its supply chain systems implemented and increase penetration of the medium business segments in manufacturing and infrastructure/construction.”

The WES share price gained 1.4% to $31.75 in late afternoon trade and Credit Suisse has a $34.07 price target on the stock.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO, Treasury Wine Estates Limited, and Wesfarmers Limited. The Motley Fool Australia has recommended ARB 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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