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TalkTalk bounces back after downgrade as RBC Capital says the stock has been oversold

Published: 11:14 01 Feb 2018 GMT

talktalk shop front
The future appears slightly brighter than it did Wednesday

Investors in TalkTalk Group PLC (LON:TALK) must be feeling a tad queasy. For a day after a downgrade sent the stock tumbling 8%, an upgrade pushed shares in the telco 2.5% higher.

Neither pieces of research were from what you’d describe as top-tier banks (the former was circulated by French outfit Exane BNP-Paribas and the latter was written by the scribblers at RBC Capital, a Canadian group); however there appears to be a new pecking order post-MiFID II.

READ: Exane BNP Paribas thinks TalkTalk shares could be worth just 30p each in a ‘bear case’ scenario

MiFID II enshrines a new set of regulations governing the way research is disseminated and, crucially, paid for.

It’s meant we’ve seen some odd movements following the release of broker research penned by analysts languishing lower down the rankings.

Changing order?

In the past the top-rated number crunchers would move markets. Traditionally, you’re talking about the Oxbridge and Ivy League types at Goldman, JP Morgan Caz, UBS and Credit Suisse.

It seems because fund managers are now having to pay directly for the output from the City’s dark and dusty basements, they are being a little more discerning; in other words they are looking for good, innovative fundamental research.

Exane’s note was a case in point on Wednesday as investors hung up on the stock after the telecoms team there questioned the sustainability of TalkTalk’s dividend stream amid debt worries.  This triggered the significant sell-off mentioned above.

Thursday, RBC told investors the stock, up 3p at 122p, had been oversold as it upgraded to ‘outperform’ with a 150p price target (albeit down from 190p).

“TalkTalk has been under pressure from falling profitability and concerns over its balance sheet,” analyst Wilton Fry said.

“While TalkTalk is not without issues, we believe these concerns are overdone.

“TalkTalk's sUBS [sUBScribers] are growing and margin pressure should ease due to wholesale price reductions.”

Not in the cross-hairs of the short sellers

It is telling the short sellers, who have a habit of getting it right more times than they get it wrong, aren’t aggressively pursuing this one.

Just over 3% of the company equity base is out on loan to investment firms actively betting its shares will fail, putting it well down the list.

Debenhams receives the dubious honour of topping that particular (mis)hit parade with 14% of its shares in the hands of the market’s bears with Provident Financial not far behind on 13.3%.

Remember, the short tracking services were the first to signal danger at Carillion as the hedge funds took a dim view on its prospects.

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