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Here’s why this top broker says buy Costa shares today

fruit
Credit: Didriks

Generally the larger an investment research house the more in-depth research they will do as they’re naturally better funded and resourced and they don’t come any larger than Goldman Sachs.

The equity research teams of large investment banks or fund managers will regularly go on trips overseas to study companies’ operations or survey hundreds or even thousands of a business’s clients just to get a read on its key performance metrics.

As such a lot of investors tend to prefer the research of the bigger investment houses as its widely considered to be more fundamental, although as I’ve written before following the crowd in investing will generally lead to crowd like returns.

Goldmans though is bullish on fruit and vegetable grower Costa Group Holdings Ltd (ASX: CGC), which a business that has divided Australia’s professional research community ever since it issued a giant downgrade to profit expectations in January 2019 that saw its share price fall nearly 40% in a day!

Today Costa stock has recovered a little to change hands for $5.07 today, with Goldmans commenting on April 2 that it sees, “continued value accretive growth capex projects driving double digit earnings growth over the next three years…For CY19E, we forecast EPS growth of 36% on pcp, in line with management guidance of NPAT-SL growth of at least 30%.”

If delivered this would be a strong result for a business that is no tiddler as Costa builds out its strategy to expand across the in demand tomatoes, avocado, blueberry and citrus fruits space.

As a grower of fruit and vegetables it’s obvious that Costa is reliant to some extent on the supply and demand dynamics affect on pricing with its recent profit downgrade being blamed on weaker prices across the tomato, berry and avocado categories in particular.

Overall though the stock is at a large discount to prices this time last year and Goldmans has a buy rating and $5.75 12 month share price target on the business. If it’s on the money then today’s buyers will be onto a good investment.

As an alternative to Costa, you could see consider businesses further down the supply chain such as Woolworths Limited (ASX: WOW) or Coles Group Ltd (ASX: COL) as they have strong market positions and some pricing power.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and Wesfarmers 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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