When analysts revise their view of a stock upwards, it can often be a good sign for the share price. And a couple of FTSE 100 shares were on the receiving end of upgrades this week.
One is Anglo American (LSE:AAL), which recently announced a major structural change. The other is Compass Group (LSE:CPG), which I’ve had a positive view of for some time.
Anglo American
On Tuesday (9 September), Anglo American announced plans to merge with Canadian miner Teck Resources. The stock is up 12% this week and analysts at Berenberg have upgraded it as a result.
Not by much – the bank still sees the stock as a Hold, but that’s an improvement on its previous Sell rating. And the £23 price target is above the current share price.
The advantages of the move are clear. Anglo American has been looking to focus on its copper, iron ore, and crop nutrients divisions and exit platinum, diamonds, and coal.
When it comes to mining, the biggest advantage a company can have is lower production costs. Joining forces with Teck should help on this front. But there are risks.
So far, the firm’s moves have come at the wrong time. Its shift has come at a time when hybrid cars (which use a lot of platinum) are winning over electric vehicles (which are more copper-intensive).
The risk with focusing on copper is that the energy transition takes longer than anticipated. But lower costs can only be a good thing, so I have the stock on my watch list for the future.
Compass Group
Analysts at Deutsche Bank upgraded Compass Group to Buy on Thursday (11 September). And their £29 price target is 10% above the current share price.
The bank’s previous Hold rating was based on recent weakness in the European travel and leisure market. But it also thinks companies with strong business models might still be attractive.
I agree with this – and Compass fits the bill. The contract caterer uses its scale to negotiate lower prices from suppliers and it uses this to provide value to customers that rivals can’t match.
A key part of the firm’s growth strategy is acquisitions. This helps it achieve those economies of scale that are so important to its competitive position, but it does bring risks.
Buying other businesses brings a risk of overpaying and this is something investors can’t ignore. And the stock isn’t exactly cheap after catching a boost from the Deutsche upgrade.
That’s why I’m keeping my eye on Compass. The firm has a strong position in a durable industry and this could be a valuable combination for investors.
Analyst upgrades
Both Anglo American and Compass Group have a mixture of Buy and Hold ratings from analysts right now. That means there’s scope for future upgrades, which could see them gather momentum.
This is something investors should pay attention to. But what matters most in both cases is the underlying business and its future prospects.
I think Anglo’s strategic shift has been unfortunately timed, but it looks like a good long-term move. And Compass has what looks to me to be an extremely durable competitive strength.
That’s why I’m following both closely. But I’m looking to be patient and wait for my opportunity, rather than rushing in too soon.
