Our market is rallying for a second day but two ASX stocks stand out as leading brokers just upgraded them to "buy".
The S&P/ASX 200 Index (Index:^AXJO) gained 0.3% as global investors continued to embrace the "Blue Wave" sweeping the US.
But the prospect of large stimulus measures in the world's biggest economy isn't the only driver for ASX stocks.
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Testing ramp-up triggers broker's "buy" upgrade
The latest COVID‐19 outbreaks around the country gave Morgans a reason to upgrade the Sonic Healthcare Limited (ASX: SHL) share price.
Testing for the contagious virus is being aggressively ramped up in Australia as Queensland becomes the latest to implement a lockdown to contain the outbreak.
"We estimate more than 9.3m tests have been conducted in 1HFY21, a c8% uplift in total tests from our prior estimate, with SHL capturing c20% market share," said Morgans.
"Testing across ROW [rest of world] remains strong, with solid estimated 2QFY21/1QFY21 increases across SHL's the main geographies (US, +67%; Ger, +57%; Switzerland, +206%; Belgium, +97%)."
More tests needed despite vaccines
The more virulent strain from the UK will only add to pressure for more people to be tested and Morgans lifted its earnings forecast for Sonic.
"We have adjusted our FY21-23 estimates based on increased assumptions for COVID-19 testing, with incremental earnings contribution between A$99m and A$375m per annum over the forecast period, representing between 6-20% of operating income," added Morgans.
"We believe investors have not completely appreciated the persistent effects of COVID-19 testing."
The broker upgraded its recommendation on the Sonic share price to "add" from "hold". It also increased its 12-month price target to $37.32 from $34.57 a share.
Broker upgrade shifts this ASX stock to higher gear
Meanwhile, the ARB Corporation Limited (ASX: ARB) share price got a boost after Citigroup upgraded the stock.
The broker changed its recommendation on the four-wheel drive accessories supplier to "buy" from "hold" as it believes ARB's medium-term outlook is improving.
The recovery in auto sales, particularly SUVs, is one positive driver for the group. The broker also believes high savings rates and limited international travel will support discretionary spending in 2021.
Additional tailwinds to drive the ARB share price
Further, the strength of the Australian dollar compared to the Thai Baht will also improve ARB's margins. The group operates factories in Thailand.
Additionally, the government's instant asset write-off should boost demand for ARB's products, while strong US demand for utes bodes well for ARB's export sales.
"Citi's proprietary ARB sales index accelerated to +16% growth in December 2020 up from +10% in November 2020 driven by strong growth in upper large SUV (+122%), large SUV (+16%) and 4×4 sales (+14%)," said Citi.
"However, we may have to wait till 2H21 to observe all the sales benefits from this tailwind as accessories for new SUV/4×4 models may not be readily available due to supply chain constraint."
Citi's 12-month price target on the ARB share price increased to $34.25 from $30.30 a share.
