Re: XAO Analysis
This is a concern! It smells of a correction or at least some significant profit taking, what will it be greed or sence?
Cheers
BT
Downgrades Continue In Market
FN Arena News - October 16 2007
By Greg Peel
As the local stock market has hit new highs, FNArena has specifically been following the recent spate of analyst downgrades of stock recommendations. From October 5 to 12, the count was 29 downgrades to 12 upgrades, and when only ASX 200 stocks are considered that count was 24 to 6.
After two more days trading, another 17 stocks have been downgraded by analysts, with 8 upgrades. Removing non-ASX 200 companies, the count is 11 to 5.
To summarise, overall down/upgrades since October 5 are running at 46:20 while the ASX 200 ratio is 35:11. Some stocks have been down/upgraded by more than one broker.
In almost every case, the main reason cited for the downgrade was a share price that had run too far beyond valuation. In almost every upgrade case the story was the same, only opposite.
New stocks to hit the downgrade team in the ASX 200 are AED Oil (AED), Commonwealth Bank ((CBA)), Emeco Holdings ((EHL)), St George Bank ((SGB)), Westpac Bank ((WBC)) and Zinifex ((ZFX)). Outside the ASX 200 were AJ Lucas ((AJL)) and Treasury Group ((TRG)).
New stocks on the upgrade side are Crane Group ((CRG)), Metcash ((MTS)) and GWA International ((GWT)).
There were three downgrades and three upgrades for AGL Energy ((AGK)) this morning, meaning that stock came out neutral after a company specific profit downgrade and subsequent share price fall. Publishing & Broadcasting ((PBL)) downgrades continue following demerger uncertainty. The AED downgrade was anticipation of a lower oil price, while Macquarie put the sword to BHP Billiton ((BHP)) and Rio Tinto ((RIO)) yesterday. Citi has been responsible for today's bank downgrades in an overall review of valuations.
As the ASX 200 crosses into negative 1% territory again this afternoon, it is fair to say today has been the first down-day of any significance since the Fed interest rate cut. This has followed a similar session in the US where analysts there, too, are beginning to suggest a pullback might be healthy. The Australian rally has been fuelled mostly by stronger commodity prices, which in turn have been fuelled largely by a weaker US dollar. Analysts at GSJB Were note there is "an almost universally positive sentiment" towards the resource sector at present.
Universally held opinions are always dangerous.
Weres highlights a shift away from mature G7 economies and into emerging market economies. (The analysts say "and Australia", but given Australia's success is derived from emerging markets you might as well call it an EM as well.) Before today the Hang Seng is up 44% year-to-date, the Shanghai Composite 122%, and the ASX 200 Resources 52%.
In Australia, industrial valuations are now back in the "extreme" zone, notes Weres, with the resource sector trading at a PE of 15x compared to the long term industrial average of 14.7x. Resource stocks usually trade at much lower PEs than their industrial counterparts because of commodity price volatility. Australian stocks are currently being "priced for perfection", notes Weres, suggesting no risk is being built in at all.
While China looks scary at 23x, PE s are backed up by 21% expected earnings growth. Such growth expectation is not the case in Australia, where industrial PEs are at 17.2x (over the 14.7x average). The inflation-adjusted figure is 19.7x, which is even more alarming given inflation risk is increasing.
Small cap PEs are higher than large cap.
GSJB Were is advising a pullback to a Neutral stance on resource stocks.