The S&P/ASX 200 Index (Index:^AXJO) re-entered a bull market with every sector rallying this afternoon.

The top 200 stock benchmark jumped 1.5% as we headed into the close – near the its intraday high! This puts the index’s gain at just over 20% since its March 23 bear market low.

This could be an opportunity to dump some stocks as the market rally only fuels fuel debate about overstretched valuations and a looming second market sell-off.

Bulls vs. bears

The pessimists are convinced that the wave of terrible economic data and a deep recession triggered by the COVID-19 pandemic will send the ASX 200 tumbling back into bear territory.

On the other end of the argument, the optimists point to the flattening coronavirus curve and the record stimulus from central banks and governments around the world.

Whether the Australian and global economy experiences a “V”, “U” or “L” shaped recovery will determine the sustainability of the current bull market, in my view.

Knowing when to hold and fold

But whichever the recovery religion you subscribe to, Morgans believes this is an opportune time to lock in some profits and cut stocks that have run too far ahead of fundamentals.

“In April, key equity indices including the S&P500 (+13%) enjoyed their biggest monthly gains since 1988,” said the broker.

“However there remains a much larger than usual range of uncertainties driving equities, and a large range of potential economic outcomes in the coming months.

“Defensive asset classes tried, but failed to match the risk-tolerance displayed in equity markets in April by largely trending. This ongoing disagreement in key asset classes is conspicuous and is cause for our broader caution on the market.”

ASX stocks to sell

Even in the most optimistic scenario where the economy bounces back strongly in the near-term, businesses won’t be the same as we learn to adapt to the post COVID-19 world.

This is why the indiscriminate rally on the market is concerning. It’s more important than ever for investors to pick the right stock to hold and the wrong ones to fold.

Morgans believes the ASX stocks with too much good news priced into their shares include iron ore miner Fortescue Metals Group Limited (ASX: FMG), share market operator ASX Limited (ASX: ASX), job advertising website SEEK Limited (ASX: SEK) and online real estate classifieds group Domain Holdings Australia Ltd (ASX: DHG)

Weaker than their rivals

The broker is also wary of another group of shares. While Morgans rates these stocks “hold”, it notes that they are poorly positioned compared to their peers.

These include dairy products company Bega Cheese Ltd (ASX: BGA), our largest gold miner Newcrest Mining Limited (ASX: NCM) and waste management company Bingo Industries Ltd (ASX: BIN) – just to name a few.

More reading

• Will high unemployment be the last straw for this ASX bull run?
• Is this ASX 200 share market recovery “fool’s gold”? This ASX fundie thinks so
• Webjet share price jumps 25%: Is it good value?
• Is the Woolworths share price a buy?
• 3 ASX 200 pandemic winners and 3 losers

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended SEEK 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.

The post Morgans warns investors to sell these ASX 200 shares in the rally appeared first on Motley Fool Australia.

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Recently, analysts from respected broker Bell Potter released a research note on automotive retailer AP Eagers Ltd (ASX: APE). Here’s why analysts think the company’s share price could be turning the corner in 2020 and beyond.

COVID-19 pandemic could see boom in new car sales

AP Eagers is Australia’s oldest listed automotive retail group, operating dealerships across the country. Despite its huge presence, AP Eagers has faced multiple headwinds in recent times with the auto sector struggling to gain traction.

New vehicle sales in Australia have been in a spiralling decline, recording 25 consecutive months of lower sales. The COVID-19 pandemic has accelerated the industry’s decline, with lockdown restrictions hampering demand. Despite the doom and gloom, analysts are optimistic that new car sales could receive a massive boost.

According to analysts, the aftermath of the COVID-19 pandemic could see new car sales receive a much-needed boost as the public avoid taking public transport. This shift in consumer behaviour was recently reflected in China, where new vehicle sales increased on a weekly basis.

How has AP Eagers responded to the pandemic?

The AP Eagers share price has bounced more than 120% from its low in late March. The company released an update in late April informing shareholders that its dealerships remained operational. Management also elaborated that the COVID-19 pandemic has allowed the company to reduce its cost base and reshape its business.

AP Eagers also secured an additional $122 million in working capital that has put the company in a better position than its smaller competitors. As a result, the current pandemic could provide AP Eagers with the opportunity to buy distressed dealerships and improve the company’s overall liquidity.

Should you buy?

Analysts are bullish on the outlook for AP Eagers, slapping a $6.50 price target on the company’s share price. AP Eagers has many positives going for it, with the asset-rich company acquiring market leader Automotive Holdings Group in 2019. In addition, AP Eagers was added to the S&P/ASX 200 Index (ASX: XJO) in the December 2019 quarterly rebalance, which could see increased demand from index funds.

In my opinion, the hypothesis of changed consumer behaviour post-pandemic is interesting. China, however, may not be the best lead indicator of future performance of new car sales in Australia. Chinese consumers have greater incentives and subsidies when it comes to buying new cars.

As a result, I think a prudent strategy for investors would be to keep ASX auto shares like AP Eagers and Carsales.com Ltd (ASX: CAR) on a watchlist so that they may capitalise if the narrative eventuates.   

More reading

• Market close: ASX 200 ends 0.5% higher
• These ASX shares made strong gains last week
• These were the best performing ASX 200 shares last week
• The latest ASX 200 shares to be upgraded by top brokers to “buy”
• These were the best performing ASX 200 shares in April

Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com 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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