The market is rallying to a new high this morning but this could be a time to take some profit on some ASX shares that have been hit by a broker downgrade.
The S&P/ASX 200 Index (Index:^AXJO) jumped 0.5% to record 7,392 during lunch time trade even as the ASX big banks and miners slumped.
Wild weather blocks the sun
But these aren’t the only ASX shares that are underperforming today. The Suncorp Group Ltd (ASX: SUN) share price fell 0.4% to $11.32 at the time of writing.
The drop in the Suncorp share price coincided with Morgan’s decision to downgrade the insurer to “hold” from “add”.
Valuation headwind for this ASX share triggered downgrade
“Broadly both insurers appear likely to come in about A$50m-A$100m above their original FY21 natural hazard allowances,” said the broker.
“We expect any potential slippage from these numbers to be limited, with only several weeks left in the half and given the remaining reinsurance protections in place for both players.”
The financial impact to Suncorp isn’t a big deal, but after the recent rally in its share price, Morgans believes the upside is limited.
The broker’s 12-month price target on the Suncorp share price is $11.44 a share.
Double downgrade hangs over this ASX share
Meanwhile, at least two brokers have downgraded the Coles Group Ltd (ASX: COL) share price following its market update.
The supermarket chain flagged that it needed to increase its investment in its business to catch up with Woolworths Group Ltd (ASX: WOW). This caused a 4.5% plunge in the Coles share price yesterday, although it’s recovered some of this loss today.
The Coles share price added 1.1% to $16.47 at the time of writing, although Citigroup reckons there isn’t much more upside to its shares.
Rising capex, falling valuation
“Coles is becoming more capital intensive, with capex to sales rising to ~2.6%, vs. 2.0% pre-COVID, a period of underinvestment compared to Woolworths,” said Citi.
“The implications of this underinvestment and subsequent catch-up spend are expected to be less severe if current conditions (rational market, strong balance sheet and low funding costs) persist, given Coles is not able to cash cover dividends.”
The broker downgraded its rating on the Coles share price to “neutral” from “buy”. It also lowered its price target to $17.20 from $18 a share.
Silver lining for the Coles share price
Credit Suisse also cut its recommendation on the Coles share price to “neutral” from “outperform” and trimmed its price target to $17.16 from $18.19 a share.
However, it agreed with management that the investment is necessary and pointed to promising signs from Cole’s ecommerce business.
Pity that wasn’t enough to save the Coles share price from the downgrade.