The S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) is poised to record its fourth day of gains after Wall Street surged higher overnight.
I think it’s still too early to call the end of the bear market but this doesn’t mean there aren’t select buying opportunities on the market.
These tend to be ASX stocks with a balance sheet to withstand the COVID-19 economic shutdown and have been unjustifiably oversold.
On firm ground
One example is the REA Group Limited (ASX: REA) share price. JP Morgan upgraded the stock by two full notches to “overweight” from “underweight” as it believes the stock is too cheap to ignore any longer.
Investors had dumped the stock on worries about how its business would be impacted by a weakening housing market and the government’s move to restrict open houses to contain the coronavirus outbreak.
REA Group operates the largest online real estate listings and JP Morgan noted that there is a around a 6-to-1 upside for the stock even on its worst-case scenario.
“In our worst-case scenario analysis, whereby listings decline by 100% over the next six months and recover to only 25% of previous trend-line in 2021 (implying a significant structural decrease in the housing turnover rate, which we believe is highly unlikely), our DCF valuation still comes to $66/share,” said the broker.
JP Morgan’s price target on REA Group is $88 a share.
Better to rent than buy
Another stock that’s looking the baby that’s been thrown out with the bathwater is Emeco Holdings Limited (ASX: EHL).
The stock shed two-thirds of its value since the market peaked in February even though demand for its rental equipment is holding up well.
This prompted Macquarie Group Ltd (ASX: MQG) to reiterated its “outperform” recommendation on the stock as it pointed out a few positives for Emeco.
“Production and output levels across the Australian mining industry remain near record highs across the key commodities of iron ore, coal, and gold,” said the broker.
“The lower AUD/USD not only helps the profitability of Australian mining operations, but makes rental equipment more attractive vs purchasing new equipment.”
What’s more, Emeco’s balance sheet is in good shape to weather the economic challenges. The group’s net debt-to-operating earnings before interest, tax, depreciation and amortisation (EBITDA) stood at a modest 1.77 times in 1HFY20.
Further, it’s US notes contains no covenant clauses except that management needs to keep capex at less than 135% of depreciation in any given financial year.
Macquarie’s 12-month price target on the stock is $1.25 a share.
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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended REA Group 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.