The Costa Group Holdings Ltd (ASX: CGC) share price is outperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index after the fresh food distributor was upgraded by Credit Suisse.
The CGC share price jumped 3.1% to $5 during lunch time trade when the ASX 200 is up 0.4% thanks to strong gains by energy stocks like the Origin Energy Ltd (ASX: ORG) share price and banks like the Commonwealth Bank of Australia (ASX: CBA) share price and Macquarie Group Ltd (ASX: MQG) share price.
The rebound in Costa Group's share price will be a welcomed relief for shareholders who watched the stock crash nearly 40% last Thursday on the back of a profit warning.
Ripe for the picking
The stock is still a long way from its recent peak but Credit Suisse thinks there's more upside as the stock looks oversold.
"Investors were nervous with Costa trading well over A$7 per share. Such a lofty share price implied hope for long-term, high output pricing and industry-surpassing EBITDAS margins," said the broker.
"Thursday's announcement that tough domestic trading conditions prevailed in December gave investors pause to reconsider these long-term assumptions."
However, Credit Suisse noted that the company's update has no material impact on calendar 2018 or 2019 net profits apart from prompting the broker to rethink about its margin forecast for the group.
"Think Orange. Not Blue. The new material information that investors dwelt upon in Costa's announcement was that domestic berry pricing was soft in late December and early January," added Credit Suisse.
"But the big swing in profit between 2019 and 2018 will be driven by citrus and international, in our view. Not domestic berry."
An upgrade and a downgrade
The sell-off in Costa's share price creates a buying opportunity with Credit Suisse upping its recommendation on the stock to "outperform" from "neutral", although the broker pared its price target to $5.60 from $7.35 a share.
The reduction in valuation was a result of a 10% to 15% cut in the broker's earnings per share assumptions for Costa Group that is drive by a more conservative output price and margin assumptions for both its local and international operations.
The sharp plunge in Costa Group's share price also reflects investor sentiment towards high price-earnings (P/E) growth stocks. These stocks have been a hot favourite over the past 12 months or so, but investors are unforgiving when it comes to any bad news during these volatile times.
The big retreat in Costa Group's shares has at least brought its P/E back to more reasonable levels although I favour stocks deeper in value territory in this phase of the bull market.
