The S&P/ASX 200 Index (Index:^AXJO) is trying to claw back from steep morning losses, but sentiment towards some ASX stocks remain poor.
The top 200 stock benchmark is down 0.5% at the time of writing, but it's at least managed to climb back to 6,000. It hit an intraday low of 5,966 in morning trade.
However, some remain deep in the red after leading brokers downgraded their recommendation on these ASX stocks.
Large legal liability
One that's wallowing in the red is the Monadelphous Group Limited (ASX: MND) share price. Shares in engineering contractor slumped 3.5% to $7.98 after UBS swung an axe to its valuation and rating.
The broker's move is driven by a legal stoush between the company and its client Rio Tinto Limited (ASX: RIO).
Rio Tinto is suing Monadelphous for $493 million as the miner believes the contractor was responsible for a fire at its Cape Lambert facility in 2019.
Risk of earnings wipeout
This is a very significant amount and Monadelphous' insurance will only goes up to $150 million. The net $343 million (before legal costs) is nearly half of Monadelphous' market cap!
"While there are many possible outcomes with respect to the legal proceedings, given the significant size of the claim, we think the proceedings may represent a share price overhang that could limit outperformance until the issue is resolved," said UBS.
The broker cut its recommendation on the stock to "neutral" from "buy" and lowered its price target to $8.45 from $13.35 a share.
ASX banks to dump
ASX bank stocks are lagging the market today, but two in particularly are underperforming after being downgraded by Macquarie Group Ltd (ASX: MQG).
These are the National Australia Bank Ltd. (ASX: NAB) share price and Bendigo and Adelaide Bank Ltd (ASX: BEN) share price, which fell by nearly 2% each at the time of writing.
The broker cut its rating on NAB by two notches to "underperform" from "outperform" and downgraded Bendigo Bank to "underperform" from "neutral".
Market expectations set too high
The bearish change of heart comes on the back of the broker's review of impairment charges for the sector.
"With ~10-15% of consumer and SME loans being deferred, a weak economic outlook and challenges stemming from the recent lockdowns in Victoria contribute to material downside risk to bank earnings, in our view," said Macquarie.
"We remain substantially below consensus, and with additional risks stemming from lockdowns in Victoria, which may extend to other states, we continue to see material downside risk to expectations."
The broker's price targets on NAB and Bendigo Bank are $17.50 and $6.25, respectively.
