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The 3 small cap ASX stocks that just got upgraded to “buy” by top brokers

Gains on the market are accelerating in after lunch trade with some investors betting that the worst for the bear market may be over.

The S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) rallied 3% at the time of writing when it was trading a little above breakeven in the morning.

No one can say definitively that we have reached a turning point, but that may be a moot point. Investors should resist picking the bottom of the market as even the best investors are able to consistently do so.

It’s a better strategy to buy stocks that you believe are deep in value territory and hang on to them for the next 12 months, if not longer.

Small cap investors looking for hints at what junior stocks may represent good value, there are three that leading brokers have just upgraded to “buy”.

A good catch

The Tassal Group Limited (ASX: TGR) surged 10.7% to $3.42 in afternoon trade after Credit Suisse upped its recommendation on the stock to “outperform” from “neutral”.

This doesn’t mean that the salmon and prawn farmer isn’t impacted by the coronavirus economic disruption, although the broker believes the demand for its products is balanced.

“Food services demand (part of domestic wholesale) has unsurprisingly weakened, and while export demand remains, restrictions impact global logistics,” said Credit Suisse.

“However, TGR has offsetting areas of strength (very strong retail demand, big increase in online & home delivery), salmon growing conditions remain positive and the balance sheet looks strong.”

Further, the broker believes Tassal is on track to hit its prawn production target and pointed out that the stock is cheap. Credit Suisse’s price target on the stock is $3.90 a share.

Enriching buy

Omega-3 nutrition technology company Clover Corporation Limited (ASX: CLV) is another that’s looking like good value, according to UBS.

The broker upgraded the stock to “buy” from “neutral” after its share price decline. The weakness isn’t only the result of the fallout from the COVID-19 pandemic but also a weaker than expected profit result.

But the broker is willing to overlook the earnings transgression for a few reasons. Firstly, Clover runs a defensive business as it’s DHA-enrichment offering is used by baby formula and other food manufacturers.

Clover’s balance sheet is also strong enough to withstand the economic slowdown and changes to European food regulations provides it with a medium-term growth driver.

UBS thinks the stock is cheap and it put a price target of $2.20 on the stock.

In the overtaking lane

One stock that is well placed to benefit from the ongoing economic turmoil is GUD Holdings Limited (ASX: GUD), if Citigroup is on the money.

The broker upgraded its recommendation on the auto parts supplier to “buy” from “neutral” after noting that the recession will prompt consumers to hold on to their vehicles for longer and to seek out cheaper independent services for maintaining their vehicles.

“Further, the weak macro environment could assist GUD in consolidating the automotive aftermarket,” said Citi.

“Finally, the relatively non-discretionary nature of GUD’s auto and water businesses should translate to a faster recovery when the COVID-19 period ends.”

While GUD’s near-term earnings is likely to be negatively impacted by the economic contraction, the bad news is in the price while little good news is.

Citi’s price target on GUD is $10.30 a share.

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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 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.