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 upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of NRG Yield (NYSE: NYLD) climbed 3% today after Goldman Sachs upgraded the renewable power company from neutral to buy.
So what: Along with the upgrade, analyst Neil Mehta boosted his price target to $41 (from $30), representing about 21% worth of upside to yesterday's close. While value investors might be turned off by the stock's big run since its July IPO, Mehta believes that there's plenty of room to run given NRG's juicy dividend growth potential and low-risk business model.
Now what: Goldman's valuation estimate seems reasonable. "The increase in our price target reflects (1) an increase in our target EV/EBITDA multiple to reflect dividend growth potential and (2) a decrease in our target yield from 4.75% to 3.5%, the median of first quartile dividend growers among utilities/MLPs," noted Goldman. "We do not incorporate any potential from NRG's proposed acquisition of EME or ROFO drop-downs in our estimates and valuation." When you combine those reasonable assumptions with NRG Yield's stable portfolio of assets, I'd have to agree that the risk/reward trade-off looks attractive.
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