Why M/A-COM Tech Will Keep Pulling Back

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of M/A-Com Technology Solutions Holdings (NASDAQ: MTSI  ) closed down 8% yesterday after Goldman Sachs downgraded the analog semiconductor company from buy to neutral.

So what: Along with the downgrade, analyst Mark Delaney reiterated his price target of $17, representing about 4% worth of upside to where the stock sits now. The stock has soared over the past year on better-than-expected growth, but Delaney thinks that current valuation leaves investors with limited appreciation potential.

Now what: While Delaney remains bullish on M/A-Com's growth prospects, it expects the stock to come under pressure. "We downgrade M/A-COM (MTSI) to Neutral from Buy due entirely to valuation, as the stock is trading above our 12-month, $17 price target (which is unchanged and based on 15X normalized EPS of $1.15), and our estimates are in line to modestly above the Street," noted Delaney. "Since adding MTSI to the Buy List on 9/6/12, the shares are up 53% vs. the S&P 500 up 17%." When you couple that hot performance with M/A-Com's small size, intensely competitive environment, and volatile shares, I'd agree that the risk/reward trade-off looks unfavorable.

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