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Why Qantas and this other ASX 200 stock were just downgraded by top brokers

The market may be bouncing back from yesterday’s steep losses. But not all stocks have been invited to the rally as brokers downgraded their recommendations on a handful of ASX shares.

The S&P/ASX 200 Index (Index:^AXJO) jumped by more than 1.5% in after lunch trade as every sector bar healthcare made gains.

Clipped wings

However, there are two notable ASX stocks that’s left behind and one of them is the Qantas Airways Limited (ASX: QAN) share price.

The flying kangaroo dived 7.8% to $3.86 at the time of writing and it isn’t only it’s discounted $1.9 billion capital raising that’s dragging on the stock.

Citigroup cut its rating on Qantas to “hold/high risk” from “buy/high risk” in the wake of the new share sale to pad its balance sheet during the unpredictable COVID-19 storm.

“We model a ramp-up in earnings and capacity from FY21e as the Australian Domestic market opens-up (2Q21e) and cost benefits are realized,” said the broker.

“However, the longer-term outlook remains considerably uncertain and extremely difficult to forecast.”

Uncertain flight path

Despite the downgrade and the dilution from the new share offer, the broker’s price target on Qantas jumps to $4.60 from $3.70 a share.

What’s interesting is that the new price target represents a near 20% upside from Qantas’ current share price.

But Citigroup warned that its forecasts (and by extension, its valuation) is subject to change as predicting when international travel will return is difficult in the current environment.

Running ahead of fundamentals

Another laggard today is the Western Areas Ltd (ASX: WSA) share price after UBS cut its recommendation on the stock to “neutral” from “buy”.

This is despite the broker’s favourable outlook for nickel – a key commodity produced by the miner.

But there may be too much good news already priced in. The Western Areas share price bounce by 62% since the market hit its bear market low point in March.

Waiting for new catalyst

The rebound is partly driven by an encouraging drilling result at the Western Gawler project, which was announced to the market this week.

“In response, we have chosen to lift our estimate of the value of exploration assets by $100m to $150m,” said the broker.

“This exploration result while encouraging is 1 drill hole and does not yet show results from assays with nickel grades. We would look for further detail before assigning more value here.”

UBS’s price target on Western Areas is $2.85 a share.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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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