There are two S&P/ASX 200 Index (Index:^AXJO) stocks that are capturing attention after they were upgraded by brokers.
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The S&P/ASX 200 Index (Index:^AXJO) kicked off the week on a positive footing. But there are two ASX stocks in particular that’re capturing attention after they were upgraded by brokers.
The upgrades show there are still bargains to be found even as some experts worry that our market is getting too expensive since March’s COVID-19 bounce.
Fertilised for a broker upgrade
One underperformer that is capturing attention is the Incitec Pivot Ltd (ASX: IPL) share price. The fertiliser supplier was upgraded by UBS to “buy” from “neutral” as it’s looking too cheap to ignore.
“IPL has underperformed the ASX200 by c.8% since May given a depressed global fertiliser price backdrop,” said UBS.
“IPL’s share price and earnings are significantly influenced by the DAP and ammonia prices, and importantly, these prices have finally found some support after a lengthy period of underperformance.”
Incitec looking cheap on current estimates
The broker believes that the improved fertiliser pricing outlook, especially for DAP, can underpin a 13% growth in earnings before interest and tax through FY21.
This will generate around $300 million in free cash flow (FCF) for the group, which will put the stock on an attractive FCF yield of 8% (vs. long run average of 6%) and a price-earnings multiple of 16 times.
The Incitec share price jumped 4.6% today to $2.18. UBS increased its price target on the stock to $2.40 from $2.25 a share.
Good upside even after surge
Another stock outperforming the market today is the Fortescue Metals Group Limited (ASX: FMG) share price.
Even though shares in the iron ore miner surged 63% since the start of calendar 2020, this didn’t stop JPMorgan from upgrading it to “overweight”.
The broker became more bullish on Fortescue after reviewing its commodity price forecasts, although it did warn that the rising Australian dollar will offset some of the gains.
“2021 and 2022 AUD is expected to be up 6%/5% respectively, which takes out some of the upgrades of USD denominated commodities,” said JPMorgan.
“For the iron ore names, we have already factored this in, along with higher iron ore prices.”
JPMorgan’s 12-month price target on Fortescue is $20 a share.
I believe this target could look conservative if the iron ore price holds around its current level of around US$120 a tonne through FY21.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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