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Top broker warns the Computershare share price is set to tumble

Short-sellers looking for quick profits may be attracted to the Computershare Limited (ASX: CPU) share price after Morgan Stanley warned that the stock is likely to fall over the next 45 days.

That prediction is painful for shareholders to hear given that the Computershare share price lost around 20% of its value over the past year. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained over 13% over the same period.

Its underperformance becomes starker when put beside other tech sector stocks. After all, the sector is home to ASX superstars like Afterpay Touch Group Ltd (ASX: APX), WiseTech Global Ltd (ASX: WTC) and Xero Limited (ASX: XRO).

More pain for Computershare shareholders

Short-sellers are those who borrow stock to sell on-market. The aim is to buy it back at a lower price later to profit from the difference.

Morgan Stanley doesn’t see any near-term turnaround for Computershare’s fortunes. If anything, it believes there is a 70% to 80% chance that the stock will drop further over the next month and a half.

“This is because the stock has traded up recently, making short term valuation much less compelling. CPU holds it AGM [annual general meeting] on Nov 14,” said the broker.

“The CEO’s address typically includes a FYTD [financial year to date] trading update relative to initial guidance.”

Lack of upgrade will feel like a downgrade

The company historically provided earnings guidance at its August reporting season, and in the last three years, management upgraded guidance later in the year. The market has been trained to expect this.

But the upgrade won’t happen this year, not in the broker’s opinion. This is likely to disappoint investors and trigger a sell-off in the stock – at least that’s Morgan Stanley’s theory as it is expecting the company to reiterate guidance.

“Our trackers show 1Q20 corporate actions volumes down y/y [year on year],” added the broker.

“Strength in US (+40% y/y) is more than offset by weakness in UK/Canada/Australia (down -10%/-40%/-50% respectively).”

Morgan Stanley rates Computershare as “underweight” with a price target of $13 a share. This means there is a more than 20% downside to the stock.

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Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of WiseTech Global and Xero. The Motley Fool Australia has recommended Computershare. 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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