I think broker recommendations can be interesting when a share price has fallen but the underlying business is still moving in the right direction.
Morgans currently sees that opportunity in two ASX shares.
Both have been given buy ratings, with the broker arguing that recent weakness has created a better entry point.
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Jumbo Interactive Ltd (ASX: JIN)
Jumbo Interactive shares are trading around $6.69 on Tuesday.
The lottery technology company recently reported underlying EBITDA of $85.2 million, up 25%, while underlying NPATA increased 20% to $50.6 million. That came despite another unusually weak year for large Australian lottery jackpots.
Morgans believes the result was stronger than the share price reaction suggested.
The broker noted that Jumbo's international operations are becoming much more meaningful, with Managed Services and Prize Draws contributing $30.3 million compared with just $7 million a year earlier.
That growth helped offset a 10% decline in Australia as large jackpot activity remained soft.
There are still some uncertainties. Morgans pointed to questions around Brightstar and FY27 guidance that came in below parts of the market's expectations.
Even so, the broker described that guidance as conservative and continues to expect Jumbo's financial position to strengthen, forecasting a return to net cash by FY29.
Morgans has retained its buy recommendation and reduced its price target slightly from $10.25 to $9.81.
From the current share price, that implies potential upside of roughly 47%.
Sigma Healthcare Ltd (ASX: SIG)
Sigma Healthcare is another ASX share Morgans thinks has been treated too harshly by investors.
The shares are currently trading around $2.69 after falling following the company's FY26 result.
Sigma delivered EBIT growth of more than 20%, while like-for-like Chemist Warehouse sales increased 13.4% in Australia and 12.2% internationally.
Australian growth slowed somewhat during the second half, but Morgans attributed this partly to a later start to the cold and flu season and a particularly strong comparison period.
Importantly, Sigma is targeting double-digit revenue and earnings growth in FY27.
The broker did trim its forecasts by around 3.5%, but it still believes the market reaction has gone too far.
Morgans said the post-result decline, which was also influenced by the possibility of some founders selling shares, had created an opportunity. As a result, the broker upgraded Sigma from accumulate to buy.
Its price target now sits at $3.19, down slightly from $3.30 previously.
That represents potential upside of around 19% from the current share price.
Foolish takeaway
Morgans sees upside in both ASX shares, although the investment cases are quite different.
Jumbo's opportunity rests on international growth becoming a larger part of the business while Australian jackpot conditions eventually normalise.
Sigma, meanwhile, is still delivering strong growth following the Chemist Warehouse combination, and Morgans believes the recent sell-off has been overdone.
Based on the broker's latest price targets, both ASX shares could have meaningful upside from here.
