Prospects of faster interest rate cuts and stronger economic activity bring back “dumped” stocks
07/27/2023
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Banks now see the Selic key interest rate, inflation, and the foreign exchange rate on a downward trend, which is the ideal situation for companies to increase their profits — Foto: Divulgação/B3
Investment analysts have begun to reassess the target prices of publicly traded companies after lowering them earlier this year, in line with the change in market sentiment.
The prospects of a faster reduction in interest rates and stronger economic activity have led to a review of macroeconomic indicators since last month. Banks now see the Selic key interest rate, inflation, and the foreign exchange rate on a downward trend, which is the ideal situation for companies to increase their profits.
In July, until the 26th, the number of target price increases represented more than triple the cuts – 76 to 25 – as shown by an analysis by Valor with reports produced by banks and brokerages to clients. There were 15 downgrades in recommendations – when banks suggest to clients which stocks to “buy,” “hold,” or “sell” – and four upgrades, while 83 remained unchanged.
The sample was based on reports from 11 consultancies compiled by Valor Pro, Valor’s real-time news service, as part of its daily coverage of listed companies. There were 110 changes, most of them only in the price targets without changing the recommendation, with a third of the revisions in the construction sector, followed by retail and healthcare.
This snapshot shows a different situation from the first months of the year. At the end of March, the number of downward revisions was almost three times as high as the number of upward revisions. At the top of the list were many companies in the healthcare and construction sectors, which are now being revisited. In the months that followed, analysts slowed down downward revisions, but the ratio of cuts to increases remained above two. In total, there were 481 cuts for 216 increases. On average, the reduction was 20% and the increase 18%.
The change in price targets and recommendations is the natural consequence of improved expectations, but it is still largely an adjustment of analysts’ spreadsheets to new assumptions about economic growth after the cuts that followed the turbulent post-election period.
The adjustment of analysts in recent weeks is in line with expectations and also follows and at the same time influences the stock market, which was below 100,000 points in March and has now surpassed 122,000 points. Stocks in the benchmark stock index Ibovespa, which at the low point were trading at 6.5 times forward earnings, are now close to the historical average of 11 times.
The increase brought many “dumped” companies back to the limelight. On Tuesday, BTG Pactual adjusted recommendations for nine construction companies, a sector to which investors see government money flowing for popular housing. But that’s not all. BTG analysts almost doubled their price targets for Mitre and Trisul, to R$10 and R$9, respectively, and started recommending them as “buy,” believing that the middle- and high-income segment will also benefit from the falling interest rates. Bradesco BBI also revised construction companies, doubling down on Plano&Plano and Tenda, with price targets at R$13 and R$15, respectively.
These are, however, still shy targets compared to the recent past. Mitre Mitre and Trisul are back to where they were 12 months ago (in the case of Mitre, the target price reached R$20 at the end of 2021). Both have doubled their value on the stock market this year and are still close to R$7. Plano&Plano and Tenda, if we consider the companies with the most liquidity, practically lead the stock market highs of the year – 177% and 197% – and closed on Tuesday at R$10.75 and R$12.56. In May 2022, Bradesco BBI had defined a price target of R$28 for Tenda.
There are similar cases in other sectors. Citi doubled the fair value of education company Yduqs to R$23, betting on rising incomes and falling unemployment, as well as the possibility of a renewed version of student lending program Fies (analysts rely heavily on “easy money” from Brasília). The new target is slightly above Tuesday’s market price, after a 106% rise this year, and still below the bank’s early 2022 target of R$25.
*Por Nelson Niero — São Paulo
Source: Valor International