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The latest ASX shares to be hit with a broker downgrade

Risk appetite may be bouncing back recently with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index chalking up more than 20% gains since January, but this isn’t the time to get complacent.

If you are looking for stocks to take profit on following the big rally, here are three that top brokers have just downgraded their recommendations on.

One of the least favoured miners

One stock that got hit with a downgrade is the Fortescue Metals Group Limited (ASX: FMG) share price, which has slumped 3% in late afternoon trade to $8.72 after Morgan Stanley lowered its rating on the iron ore miner to “underweight” from “equal-weight”.

“FMG is operationally a high-quality company. However, the stock is now ~13% higher than our price target,” said the broker.

“We expect the headline iron ore price and 58% price realization to recede from current highs starting 1HCY20 as supply rises and Chinese mill profitability likely benefits from lower raw material prices.”

Morgan Stanley has a $7.85 per share price target on Fortescue.

Not enough supplements

Meanwhile, the Clover Corporation Limited (ASX: CLV) share price has fallen out of favour with UBS. The broker dropped its recommendation on the stock to “neutral” from “buy” even after management posted a good full year result with earnings before interest and tax jumping by a third to $13.6 million.

“Growth was strong in all regions, before the impacts of European regulatory changes (likely in FY21E) and any potential changes in China (draft law published Sep-2018 but little information since),” said UBS.

“We continue to view the outlook as strongly favourable for CLV but following 98% share appreciation since Feb 2019, we believe most of the positive outlook (refer initiation report) is now largely factored into the share price.”

Having said that, if Chinese regulators were to follow the Europeans and mandated DHA increases in infant formula, the broker will likely have to revisit its decision to downgrade the stock.

UBS has a 12-month price target of $2.75 a share on Clover.

Burning out

A downgrade by Bell Potter doesn’t seem to have hurt the Avita Medical Ltd (ASX: AVH) share price with the stock trading 1.2% higher at 60 cents ahead of the market close.

The emerging biotech has received approval from the FDA to use its to conduct a pivotal trial of Recell in combination with meshed autografting for the treatment of trauma wounds.

“The inclusion of the trauma wound market as a label indication represents a vast new market for Avita, nevertheless the recent increase in market capitalisation to greater than $1.1bn indicates the value is already priced in,” said Bell Potter.

“The model also assumes an increase in operating loss in FY20 to $19.8m largely as a result of increased operating costs and deferral of revenues from the BARDA procurement. Valuation is amended from $0.68 to $0.69. Our recommendation is reduced to Speculative Hold.”

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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 Clover Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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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