Our market went into a freefall on Thursday with ASX big bank stocks leading the tumble. But these aren’t the only stocks to come under pressure as leading brokers downgraded two others to “sell”.
The S&P/ASX 200 Index (Index:^AXJO) fell 3.1% as it slipped below the psychologically important 6,000 mark with every sector dropping into negative territory.
We could see a few more days of weakness given the market’s big rebound from its COVID-19 low, but I don’t see the ASX 200 dropping back into a bear market.
While investors could see the weakness as a buying opportunity, brokers think you should be avoiding these two ASX stocks.
Cold chill from US mortgage business
The first is share registry services group Computershare Limited (ASX: CPU) as Citigroup downgraded its recommendation on the stock to “sell” from “neutral”.
“Our Deep Dive into CPU’s second largest business (US mortgage servicing) highlights several near-term challenges, all the more so if, as we expect, refi picks up again,” said Citigroup.
“There is the allure of potential positives down the track, but these are of uncertain size and likely some time away.”
Negatives outweigh positives
The positives the broker is referring to is earn one-off fees and the potential for higher margin sub-servicing work on non-performing loans. Around 8.5% of US mortgages are on a loan holiday.
But the upside may not eventuate until the second half of FY21 at the earliest and Citi pointed out that the tailwinds are hard to quantify.
In the meantime, revenue growth from Computershare’s US mortgage servicing division is expected to slow from around 20% CAGR over the last four years to about 6%.
The Computershare share price crashed 8.1% to $12.88 today. Citi’s price target on the stock is $12 a share.
In a hole
Another stock that took a hit from a broker downgrade was the South32 Ltd (ASX: S32) share price.
The stock lost 4.4% to $2.19 after Macquarie Group Ltd (ASX: MQG) lowed its rating on the miner to “underperform” from “neutral”.
The broker believes the downside risks to South32 is intensifying with most of its key commodities trading under Macquarie’s forecasts.
Earnings disappointment to come?
“The downside risk is headlined by hard coking coal which is trading 26% and 33% below our FY21 and FY22 estimates, respectively,” said the broker.
“Most other commodities and operating currencies are also trading well below our forecasts. Only manganese offers material upside risks to our FY21 assumptions.”
Macquarie’s 12-month price target on South32 is $1.90 a share.
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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited and South32 Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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