Our market may be trading at a fresh 11.5-year high today but it could be time to take profit on a number of these stocks even though the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is likely to push higher on falling interest rates and a trade truce between US and China.
It’s hard to think negative thoughts in such a risk-on environment as the top 200 benchmark rallies 0.5% to 6,888 into the market close.
But you know what they say about being fearful when others are greedy and this may be the time to pay attention to the latest stocks to cop a negative review from some of our top brokers.
Too much good news
The first noteworthy one is mining engineering group Monadelphous Group Limited (ASX: MND). The Monadelphous share price has rallied around 25% over the past year and UBS thinks its run past good value, prompting the broker to cut its recommendation on the stock to “neutral” from “buy”.
The downgrade comes even though the outlook for the group is positive with iron ore miners ramping up activity to make hay while the sun shines.
“Our detailed analysis of the WA iron ore capex cycle points to a total capital investment of US$21bn over the next 4-5 years. We estimate the total addressable revenue pool for Monadelphous is c.A$3bn,” said UBS which has a $19 per share price target on the stock.
“[However] Monadelphous is trading at an FY20E EV/EBITDA multiple of 11x (UBSe), which is in line with the prior cycle peak, suggesting limited valuation upside from here.”
When rate cuts mean an earnings cut
The second stock to fall out of favour is Netwealth Group Ltd (ASX: NWL), which is under pressure as the Reserve Bank of Australia (RBA) cut interest rates again yesterday.
“RBA cash rate cut triggers initial account holders for NWL to earn net effective negative cash returns. Our analysis highlights the return on cash allocation for super member accounts if fully passed through will be a gross 0.50%,” said Macquarie.
“However, factoring in the admin fee for the portion of cash the net effective return for NWL super account holders on low balances will be -9bps.”
This means investors using the platform and have selected to protect their capital by selecting the cash option will be losing money. There’s speculation that authorities will step in to right this wrong if Netwealth doesn’t.
The company’s UK operations is also another drag with Macquarie noting that independent platforms in that market earn way less than Netwealth does in Australia.
Macquarie had downgraded the stock to “underperform” from “Neutral” and has slapped a 12-month price target of $6.05 a share.
Running ahead of fundamentals
One of the hottest medical devices stocks on the market also couldn’t avoid a “sell” call by Citigroup, which just initiated coverage on Nanosonics Ltd. (ASX: NAN).
While the broker acknowledged the large potential for the company, which has essentially re-written the rule book for disinfecting ultrasound probes and is about to expand into Japan, it believes too much good news is priced into the Nanosonics share price after its 70% plus rally over the past 12-months.
“While we are optimistic that new products will be successfully launched, the current share price is implying an accelerated new product launch in a significantly sized market,” said Citi which has a $4.40 price target on the stock.
“We think this is overly optimistic and will review once the product has been announced.”
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Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Nanosonics Limited. The Motley Fool Australia owns shares of Netwealth. The Motley Fool Australia has recommended Nanosonics 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.