Don’t let the strong run on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index fool you into a sense of complacency. There are some stocks that aren’t worth holding in any kind of market and investors could capitalise on the risk-on mood to shed some of these dogs.
If you are wondering which stocks you should shed from your portfolio, top brokers have a few recommendations to throw your way.
Don’t bank on this stock
The first is the widely held big bank Westpac Banking Corp (ASX: WBC) and WBC’s share price jump of 0.8% to $26.54 this afternoon may be an opportune time for shareholders to cut and run, according to Morgan Stanley.
While the broker thinks its logical for Westpac to announce the divestment of its wealth advice business, it sees growing risk that consensus profit forecasts for the bank will be cut in the not too distant future.
“We see lower returns and rising risks in retail banking; more exposure to the end of the mortgage bull market; an ongoing reinvestment burden with little prospect of self-help on costs; non-housing loss rates below the peer average; a limited capital buffer; growing risk of a dividend cut; and fulltrading multiples, with risk of a further de-rating,”
The broker has reiterated its “underweight” recommendation on the stock with a price target of $24.30 a share.
Another stock that isn’t poplar with investors is Sigma Healthcare Ltd (ASX: SIG), which spurned the takeover offer from its rival Australian Pharmaceutical Industries Ltd (ASX: API) as it posted a $76.2 million full year earnings before interest and tax (EBIT) that was $1.2 million ahead of management guidance.
That isn’t enough to convince Credit Suisse that the stock is worth backing with the broker sticking to its “underperform” rating on Sigma with a $0.50 price target.
“In our view, a key risk for SIG is API’s 13% stake (~A$75mn). Given SIG rejected the merger and API has closed its data room, stating it is ‘reviewing its shareholding in SIG’, we think it is likely that API would look to exit its position,” said Credit Suisse.
The broker isn’t impressed with Sigma’s profit results either as it noted that margins are being squeezed and cash performance was weak.
Credit Suisse isn’t alone in its bearish view. UBS has also downgraded the stock to “sell” from “neutral” as it thought the stock looked overpriced.
Meanwhile, Citigroup is urging shareholders in Treasury Wine Estates Ltd (ASX: TWE) to dump the stock as it believes the US wine market could be oversupplied.
“A few data releases on the US wine market put perspective on Treasury’s position. We are encouraged by continued trading up behaviour by US consumers, but concerned by rising wine supply,” said the broker.
“The company’s potential M&A targets are unchanged albeit pricing may be different with premium brands remaining well bid. Lastly, data on US wine shipments show very little impact on Treasury from its shift to direct distribution.
“Overall, our concern on Treasury in the US is the potential for more intense competition given higher supply.”
Citigroup retained its “sell” recommendation and price target of $14.90 on the TWE share price.
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Motley Fool contributor Brendon Lau owns shares of Westpac Banking. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates 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.