Valuations on the S&P/ASX 200 Index (Index:^AXJO) may be looking stretched during this reporting season, but this didn't stop brokers from upgrading three ASX stocks today.
One of these upgrade candidates is from the retail sector, which has seen the JB Hi-Fi Limited (ASX: JBH) share price and Kogan.com Ltd (ASX: KGN) share price hit record highs on strong results.
There's expectation that the Harvey Norman Holdings Limited (ASX: HVN) could be next to reach for the stars after JPMorgan lifted its rating on the stock to "overweight" from "neutral".
Better leverage to spending
The broker is looking for retailers that are well placed during the COVID-19 fallout that aren't being artificially bolstered by temporary support measures. These include government wage supplements that have an expiry date and one-off withdrawals from superannuation.
"Rather, retailer success has been due to lower spending in other consumption categories," said JPMorgan.
"This is expected to drive strong FY20 results with trading to start 1H21 to be strong, and while Melbourne Stage 4 lockdown is a negative, the size overall is modest."
The broker upgraded Harvey Norman due to its operating leverage and exposure to the housing market. JP Morgan's price target on the stock is $4.75 a share.
Too cheap to ignore
Another stock to get upgraded is the Metcash Limited (ASX: MTS) share price. Credit Suisse upped its call on the grocery distributor to "outperform" from "neutral" as it noted the stock is trading at a big discount to the Woolworths Group Ltd (ASX: WOW) share price.
This is unjustified as many of the tailwinds from COVID-19 that are lifting Woolies applies to Metcash.
"With macro factors expected to support expenditure on food retail and localised shopping behaviour continuing at least for the near term, Metcash is likely to experience mid-to-high single digit underlying sales growth," said the broker.
"The near-term impact from Melbourne's stage 4 restrictions is low as only 1% of Mitre 10 and Home Timber and Hardware stores are based in the Melbourne metropolitan region."
Credit Suisse's 12-month price target on Metcash is $3.47 a share.
Expanding upside
Meanwhile, the recent pullback in the Breville Group Ltd (ASX: BRG) share price prompted Goldman Sachs to lift its recommendation on the stock to "buy".
The broker believes the market isn't fully appreciating the earnings growth potential for the kitchen appliance maker after it posted a profit result that was ahead of Goldman's expectations.
"BRG continues to extend its runway for growth as it expands into new geographies (Italy, Portugal and Mexico were confirmed for FY21)," said the broker.
"Our analysis shows that if BRG were to achieve 50% of the relative market penetration it has in the ANZ market in North American and European markets, we estimate its EBIT potential could be 78% higher than our current FY23E EBIT forecast.
"And if BRG achieved 100% of the relative market penetration of ANZ, its EBIT potential could be 217% higher."
The broker's 12-month price target on Breville is $30.35 a share.
