Could some of the most beaten down S&P/ASX 200 (Index:^AXJO) (ASX:XJO) stocks be winners in 2020?
It's a question worth pondering as market valuation is looking somewhat stretched from the downgrade in consensus FY20 forecasts as ASX shares start to regain some of the lost momentum from the US-China trade war.
Risk assets are being bolstered by cheap money and this trend is likely to remain unchecked as the US Federal Reserve indicated it's still keeping its interest rate cutting bias in the wake of the latest US job figures.
The same is true for the Reserve Bank of Australia and that could be enough to keep the party going on the share market despite valuation concerns.
But stocks cast into the sin bin won't have to worry about valuation. They aren't looking overextended as their share prices are lagging by a wide margin. While I am loath to bargain hunt de-rated stocks, top brokers have picked two that they think are well-worth backing.
Special dividend candidate
The first is the TPG Telecom Ltd (ASX: TPM) share price, which has shed more than 20% of its value when the Telstra Corporation Ltd (ASX: TLS) share price has gained around 15% over the past year.
But TPG's latest profit results from last week has convinced JP Morgan to upgrade its price target on the stock to $7.25 from $6.90 a share and to reiterate its "overweight" recommendation on the stock.
The telco's results were ahead of the broker's estimates while its FY20 earnings before interest, tax, depreciation and amortisation (EBITDA) guidance was in-line with what JP Morgan was expecting.
However, the broker does admit that everything hinges largely on the outcome of the court case to allow the group to merge with Vodafone.
If the court overturns the ACCC's block on the merger, TPG could pay a special dividend worth as much as 35 cents a share.
A dog to bank on
Another ugly dog that's worth backing is embattled UK-bank CYBG PLC/IDR UNRESTR (ASX: CYB), according to Macquarie Group Ltd (ASX: MQG).
It's a controversial call given the PPI provisioning fiasco that has dented management's reputation, but Macquarie believes the stock has been oversold.
"While we understand that today's announcement would disappoint even the most patient investors, we believe the share price response appears excessive," said the broker.
"CYBG underperformed the UK majors by ~30% over the last quarter and ~50% over the last twelve months. At ~0.5x NTA we believe it appears oversold, although recognise that a capital raising (if required) at the current valuation would be highly dilutive."
Macquarie has an "outperform" recommendation on the stock with a $3 a share 12-month price target.
