The S&P/ASX 200 Index (Index:^AXJO) is holding up well during this month's reporting season. But some popular stocks are starting to look overstretched and have been slapped with broker downgrades.
This doesn't take anything away from the fact that profit results have been more resilient to COVID-19 than originally anticipated.
But the results don't necessarily justify current valuations, especially in cases where some ASX stocks are breaking record highs.
Image source: Getty Images
Downshifting a gear
One stock that zoomed to new highs is the Carsales.Com Ltd (ASX: CAR) share price. Shares in the online auto classifieds group jumped 2% to $20.64 in late afternoon trade following its better than expected result.
But Morgans thinks now is the time to cut its recommendation on Carsales to "hold" from "add".
Silver lining couldn't ward off a downgrade
This is despite the fact that COVID-19 was not all bad news for the Carsales. While coronavirus made a big dent in the group's bottom line, it may have perversely helped defer a structural headwind for Carsales.
Consumers were moving away from car ownership before the crisis but may now be dissuaded from using public transport.
"Covid has also given greater impetus to the consumers move to research and transact for cars online, which obviously plays directly into CARs wheelhouse," said Morgans.
Nonetheless, with the stock currently trading above the broker's upgraded price target of $19.17 (previously $14.58), Morgans was left little choice but to take it off its buy list.
Tasting a little too rich
Another stock that jumped to a record high is the Domino's Pizza Enterprises Ltd. (ASX: DMP) share price.
Shares in the fast food chain jumped 2.8% to $86.02 at the time of writing and Goldman Sachs thinks its starting to look a little overcooked.
The broker downgraded its recommendation on Domino's to "neutral" from "buy" even as the company delivered a decent profit result.
COVID skews results
While Domino's earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 73% was a little under the broker's estimates, it included $10.9 million in COVID store support.
Adjusting for this, EBITDA would be slightly ahead instead.
"Same store sales accelerated in 4Q20 to 12% (4.8% 3Q20) and have continued at 11% into 1Q21," said the broker.
"In our view, the growth pipeline in each region remains solid. Operational execution continues to be strong, especially in Japan and Germany."
However, the good news is already baked into the price. Goldman's price target on Domino's is $82.80 a share.
Not enough good news
Meanwhile, Credit Suisse lowered its rating on the WiseTech Global Ltd (ASX: WTC) share price to "neutral" from "outperform".
The move comes after the logistics technology group delivered a 17% increase in FY20 EBITDA to $127 million, which is 6% ahead of the broker's expectations.
"We found the result incrementally supportive of our long-term positive view on the opportunity," said Credit Suisse.
"That said, we struggle to bridge the very strong share price performance with the new news in the result, particularly given the stronger-than-expected FY21 earnings guidance was partly supported by increased R&D capitalization."
The broker's 12-month price target on WiseTech is $28 a share. The stock fell 1.7% to $27.40 on Thursday.
