Changing Preferences Among Stockbroker Strategists

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By Rudi Filapek-Vandyck

Citi's US market strategist Tobias M Levkovich issued a warning about gradually "overheating" equity markets on Monday, while broadly mentioning the same characteristics I summed up in this week's Weekly Insights email (paying subscribers: see email in your inbox). The main difference is that Levkovich has access to various proprietary indicators, while I had to rely on observations and indicators provided elsewhere. The end conclusion is the same though: market sentiment is approaching levels of extremity that seem "uncomfortably high", but it is not there as yet.

Levkovich also refers to Chinese equities that have tended to lead pullbacks in the US by some three months over the years past. Well, Chinese equities peaked in early November and have been sliding since. Assuming the correlation remains intact, this could make for a reversal in February.

Market strategists at Goldman Sachs have made two changes to the stockbroker's so-called Conviction List. This list consists in essence of Buy and Sell ideas that carry the highest conviction across the stockbroker's research universe. Goldman Sachs is now doubting whether the projected ad recovery in Australia will be as strong as assumed previously, while AFL broadcast rights could deliver another negative. Hence the strategists have removed Ten Network ((TEN)) from the list,

Replacing Ten is UGL ((UGL)) for whom the stockbroker anticipates strong earnings momentum. Add a cheap valuation and what we get is a potential projected return in the vicinity of 32% for the year ahead.

Other stocks on the list are Acquarius Platinum ((AQP)), BHP Billiton ((BHP)), CFS Retail Property ((CFX)), News Corp (NWS)), PanAust ((PNA)) and Wesfarmers ((WES)). All are rated Buy-with-Conviction.

Equity strategists at RBS have lined up their preferred candidates (Buy-with-conviction) amongst small and mid-cap companies. Most preferred at RBS are Pacific Brands ((PBG)), SAI Global ((SAI)), Bradken ((BKN)), Emeco ((EHL)), Peet ((PPC)) and WHK Group ((WHG)). Suggested upside by the broker's twelve month target prices vary from 11% for Bradken to 39% for Pacific Brands.

RBS banking analysts have turned more positive towards regional banks in Australia. Their latest sector update also contains a switch in preference from Bendigo and Adelaide Bank ((BEN)) in favour of Bank of Queensland ((BOQ)). As a result, the former was downgraded to Hold while the latter has been upgraded to Buy.

Interestingly, Bank of Queensland is still beaten by ANZ Bank ((ANZ)) and National ((NAB)) when compared to banks in Australia in general.

Also, Goldman Sachs initiated coverage on QR National ((QRN)) today, placing a target of no less than $3.15 on the shares. The stockbroker justifies the move by stating its discounted cash flow calculations actually come up with a valuation of $3.60 for the shares. Goldman Sachs analysts acknowledge putting a valuation on the shares in Australia's largest coal haulage operator is "unusually difficult". Short term the Queensland operations will be hit by recent floods and thus a Hold rating has been deemed appropriate. This seems a bit odd given the shares are trading some 17% below target (no doubt the analysts are waiting for a catalyst to upgrade later in the year).

Property specialists at JP Morgan have reiterated their view the sector is undervalued, on top of recent underperformance.

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