It's perhaps symptomatic of how expensive our market is looking as some experts believe stocks cast into the "sin bin" are looking good value.
The Link Administration Holdings Ltd (ASX: LNK) share price is a case in point. The stock had been hammered nearly 30% since it issued a profit warning last Friday but the stock is bouncing back this morning after Morgan Stanley said the market cast-off is looking way too oversold.
The investment platform and services group is the best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index this morning with the stock surging 4.1% to $5.80 as the Abacus Property Group (ASX: ABP) share price and Resolute Mining Limited (ASX: RSG) share price took second and third places.
Down but not out
Link will need to climb a lot higher to regain the ground it's lost after issuing a second profit warning in two years but Morgan Stanley thinks it can as it reiterated its "overweight" recommendation on the stock with a price target of $8.20 a share. This implies another 46% upside to fair value!
Management's FY19 operating earnings before interest, tax, depreciation and amortisation (EBITDA) guidance of $350 million to $360 million is around 10% below the broker's forecast but Morgan Stanley is willing to forgive and forget as the stock is trading on a low 13 times price-earnings multiple (excluding the sale of PEXA).
Many of the factors driving the downgrade also appear to be caused by one-off events of a timing issue.
For instance, weakness in the Fund Administration business is primarily caused by superannuation reforms that are brought forward by six to nine months and cost blowouts from client migration and heightened activity what will ease by year-end.
However, the headwinds in its European operations is a little harder to predict. While Brexit is causing turmoil in the market and the political situation should get resolved over the coming months, the magnitude of the decline is worrying given that Link's rivals, such as Computershare Limited (ASX: CPU), haven't experienced a similar scale downturn.
FY21 inflection point
"Does the trading update change our view? In Fund Admin, no. We still believe that concerns are overdone and that valuation discount will unwind. In Europe, we think the structural growth story remains intact, although Brexit uncertainty could remain a headwind through 2019," said the broker.
"We see an earnings inflection in FY21e as Fund Admin returns to growth, LAS synergies crystalize and PEXA becomes profitable."
The question is whether investors are willing to accept a flat FY20.
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