The market is holding on to recent gains but the big rally in the Costa Group Holdings Ltd (ASX: CGC) share price came to a jarring halt after it was downgraded by a leading broker.
The CGC share price tumbled 5.6% to $4.05 in early trade when the S&P/ASX 200 Index (Index:^AXJO) is trading a little under breakeven.
This makes the Costa share price the worst performing stock on the ASX 200 at the time of writing. The fruit and mushroom grower is the only non-gold stock on the worst losers list.
Costa share price downgraded by broker
The underperformance of the CGC share price comes after it surged by around 70% over the past year.
All the good news and little of the 2021 risks looks to be priced into the stock, according to Citigroup.
The broker downgraded the Costa share price to “neutral” from “buy” even as it lifted its 12-month price target to $4.30 from $3.75 a share.
Blueberries leave sour taste
“We believe Costa remains well positioned to benefit from better growing conditions and higher prices in some produce categories,” said Citi.
“However, the fundamentals in berries are still mixed with elevated supply likely to restrict growth in margins.”
There has been an oversupply of blueberries over the past five years. While consumption jumped by 2.5 times over the period, prices have been falling, according to Citi.
No price recovery expected in 2021
While the market is looking more balanced today, the broker doubts we will see any price growth due to higher crop yields.
“In response to more competition in blueberries, Costa is shifting its mix both through the time it harvests and the type of berries it produces,” added Citi.
“We expect the company to deliver 3%-5% revenue growth sustainably in berries, largely through a better mix of sales. Blackberry hectare growth is also a source of upside.”
Risks and rewards are finely balanced
Citrus exports are another sweet spot for the group and a big reason behind Citi’s decision to boost its target price on the Costa share price.
The price of citrus fruits is up by more than 60% in some markets, although this is partially offset by weaker mushroom prices.
Other headwinds for Costa include the risks of higher costs from its Moroccan operations and higher rental expenses.