Top City brokers are always publishing research reports on the stocks they like and hate the most. The majority of this research isn’t available for the average investor. So, to help you make informed investment decisions, I’ve done a deep dive into analysts’ research to find the stocks the City believes you should be selling, or avoiding, today.
Overvalued
Back at the beginning of 2018, Shore Capital was advising clients to buy Barratt Developments (LSE: BDEV). However, in the middle of last week, the broker decided to reverse its decision and downgraded the stock from ‘buy’ to ‘sell’.
This is a big move and it seems to be based on the company’s growth prospects. Shore downgraded the stock after the homebuilder published its results for the year ended 30 July.
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While the number of properties sold increased 1.6% year-on-year, management warned the number of homes sold by Barratt would come in below expectations in the current financial year. They’d promised growth of 5%, but this is now expected to be just 3%.
The lack of growth is disappointing considering the stock’s valuation. As Peel Hunt noted after the publication of the results, Barratt is now trading at a price to net asset value of 1.45 for 2020, slightly above the sector average of 1.35. Although a dividend yield of 7.4% for 2019 does sweeten the appeal.
Sector laggard
Meanwhile, Deutsche Bank is a seller of Berkeley (LSE: BKG). The investment bank believes the company is worth just 3,428p, around 11% below the current share price. Interestingly, analysts at the German bank are overwhelmingly positive on the home building sector in general. They believe “another powerful wave” of government support could be on the cards as politicians try and win over voters.
Still, Berkeley seems to be out of favour because of its valuation. Analysts are expecting earnings per share to decline by around 29% this year. Even after factoring in this decline, the stock is trading as a forward P/E of 11.6, a premium of 30% to the broader homebuilding sector average. The company’s dividend yield of 5.2% is also below average.
Berkeley’s price to net asset value ratio sits at 1.65, which makes it even more expensive than Barratt on this metric. Looking at these figures, it’s clear why analysts at Deutsche Bank believe Berkeley is overvalued at current levels
Risky investment
Analysts at Deutsche Bank also downgraded their outlook for mining group Antofagasta (LSE: ANTO) last week. After awarding the company a ‘hold’ rating and 930p and price target back in April, analysts have now downgraded Antofagasta to ‘sell’.
This appears to be another valuation call. Over the past 12 months, the outlook for the mining group has steadily deteriorated and analysts across the City have downgraded their prospects for the business. This time last year, analysts were expecting Antofagasta to earn $0.91 per share for full-year 2019. Now they’re forecasting just $0.62, a 29% year-on-year decline.
As analyst as expectations have deteriorated, the share price has remained constant. As a result, its shares are now dealing at a forward P/E of 16, making the company by far the most expensive in the mining sector. The rest of the industry is dealing as a forward P/E of just 8.
Looking at this evaluation, it’s clear to me why analysts think now could be an excellent time to move away from the stock.
