The market continues to power ahead on a better than expected start to the reporting season, but valuations for some ASX stocks are getting hard to justify.
The S&P/ASX 200 Index (Index:^AXJO) jumped 0.5% in after lunch trade with most sectors making gains.
But brokers warn that some stocks are starting to look overbought and have downgraded their recommendations on the following ASX stocks.
Tasting a tat too rich
One stock that got cut today is the Breville Group Ltd (ASX: BRG) share price, which is trading at a record high of $28.50 at the time of writing.
A big profit upgrade by JS Global is fuelling enthusiasm for Breville as the Chinese kitchen appliance maker is enjoying strong demand for its products.
That bodes well for Breville although Credit Suisse is struggling to keep the stock on its “buy” list after the BRG share price surged by more than 160% since March.
Big premium drives downgrade
“BRG is trading on an unusually high 224% premium to the ASXI [ASX Industrials Index] and the COVID-19 environment remains highly uncertain,” said the broker.
“We therefore think this is a good opportunity to take stock.”
Credit Suisse downgraded the stock to “neutral” from “outperform” two days before the company hands in its profit results.
However, the broker lifted its 12-month price target to $26.81 from $20.27 a share to reflect the positive sales momentum for its products.
When an upgrade leads to a downgrade
Another stock to be hit with a downgrade despite positive trading conditions is the Mineral Resources Limited (ASX: MIN) share price.
Shares in the mining services group also hit a record high of $28.32 this afternoon, thanks in no small part to brokers upgrading their forecast iron ore price for the next few years.
Mineral Resources benefits from the more positive outlook for the steel making commodity. Not only does it offer mining services (like crushing) to some of the world’s largest iron ore miners, it also owns iron ore and mineral sands projects.
Better value elsewhere
JP Morgan is one of the brokers that lifted its price estimates for the commodity. It expects iron ore to average US$100 a tonne in 2021 (up 19%) and that prompted it to lift its price target on Mineral Resources to $21.40 a share from $18.80.
However, the MIN share price is trading too far above the upgraded valuation, which forced JP Morgan to downgraded its rating on Mineral Resources to “underweight” from “neutral”.
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Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd. 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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