The latest ASX stocks to be hit by broker downgrades

Our market is rebounding today but not all ASX stocks are joining the party as some got slugged by a broker downgrade.

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Our market is rebounding today but not all ASX stocks are joining the party as some got slugged by a broker downgrade.

The S&P/ASX 200 Index (Index:^AXJO) jumped 0.7% in late morning trade with most sectors trading higher.

There are exceptions though with leading brokers cutting their recommendations on three ASX stocks today.

Metal fatigue bending SGM share price

One that's left out in the cold is the Sims Ltd (ASX: SGM) share price. Shares in the scrap metal trader fell 1.4% to $12.53 at the time of writing.

The weakness in the SGM share price coincided with a downgrade by Goldman Sachs, which lowered its recommendation to "sell" from "neutral".

The broker believes that recent supply constrains that drove a surge in steel spreads have peaked, and that prices are poised to turn lower.

ASX steel shares downgraded by broker

"In recent weeks we have seen some improvement in supply, and a broad based retreat in both steel pricing, input commodities and spreads," said Goldman.

"We expect that as CY21 progresses, market dynamics and pricing (and spreads) will normalise back to prior trading bands."   

The broker warns that the earnings before interest, tax, depreciation and amortisation (EBITDA) multiples for the sector will compress by around 15%.

As an aside, Goldman also downgraded its rating on BlueScope Steel Limited (ASX: BSL) share price to "neutral" from "buy" at the same time, but that was just before BlueScope issued a profit upgrade.

Goldman's 12-month price target on the SGM share price is $11.38 a share.

Valuation concerns triggers downgrade

Another stock that's lost favour with investors is the Orocobre Limited (ASX: ORE) share price. The lithium miner slumped 5.7% to $5.42 as more than one broker downgraded their rating on the ORE share price after it posted its quarterly update.

The issue isn't so much its latest quarterly production report but its valuation. If anything, the production figures were the third-highest on record, aided by record brine concentration 8000-9000ppm, according to Credit Suisse.

But the broker thinks the recent share price rally is overdone and changed its recommendation to "underweight" from "neutral" with a 12-month price target of $5 a share.

Citigroup is another that downgraded the ORE share price. It cut its rating to "neutral" from "buy". This was despite the fact that ORE's quarterly figures came in ahead of the broker's expectations.

But Citi also thinks the stock has run up too quickly. It's price target on ORE is $6.75 a share.

QAN share price running low on fuel

Taking about reaching full valuation, the Qantas Airways Limited (ASX: QAN) may also struggle to ascend further.

Macquarie Group Ltd (ASX: MQG) lowered its recommendation on the Flying Kangaroo to "neutral" from "outperform".

Unpredictable and sudden border closures due to COVID-19 is impacting on Qantas' earnings recovery flight path.

The stock's recent rally also means it's only trading at a modest 10% discount to its long-run trading multiples, added the broker.

Macquarie's 12-month price target on the QAN share price is $5.05 a share.

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Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited and Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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