Guess which ASX 200 stock was just upgraded to a buy rating

Why did the broker just turn bullish? Let's find out.

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Brickworks Limited (ASX: BKW) shares were on form on Wednesday.

The ASX 200 stock ended the day with a gain of 2.5% to $26.91.

This compares favourably to a 0.75% decline by the benchmark ASX 200 index.

Why were investors buying the building products company's shares? Let's find out what was getting investors excited.

Why did this ASX 200 stock outperform?

The catalyst for this outperformance was the release of a bullish broker note out Bell Potter this morning.

According to the note, the broker has upgraded the ASX 200 stock to a buy rating (from hold) with an improved price target of $32.00 (from $31.00).

Based on its current share price, this implies potential upside of 15% for investors over the next 12 months.

In addition, the broker is forecasting a dividend yield of approximately 2.5%, which stretches the total potential return beyond 17%.

This means that a $10,000 investment would turn into approximately $1,170 if Bell Potter is on the money with its recommendation.

Why is Bell Potter bullish?

The broker made the move for a couple of reasons. One was that it feels that recent weakness has created a buying opportunity for investors. The other is its belief that Brickworks is well-positioned to benefit from interest rate cuts.

In respect to the latter, the broker said:

As Australia approaches a potential interest rate pivot point (Bell Potter's base case for our first cut is Feb'24), we see it as an opportune time to consider BKW's potential pathway for valuation uplift through the next cycle.

Bell Potter also revealed something that it thinks the market underappreciates with this ASX 200 stock. It said:

We think an underappreciated part of an investment in BKW remains its ability unlock earnings/value from rent reversion (BKW is c.50% short-WALE and -28% under-rented) and property development (320k sqm new prime GLA over next 5-years). We think BKW could reasonably add an average +$0.50ps in NTA per annum for each of the next five years, holding today's cap rate constant.

In light of the above, the broker thinks that now would be a good time to pick up Brickworks shares, which are currently trading 14% lower than their 52-week high. It concludes:

We view the pullback in share price as an opportunity to get BMats and Property at or close to the bottom of the cycle. We upgrade our rating to Buy with a PT of $32.00ps.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks. The Motley Fool Australia has positions in and has recommended Brickworks. 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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