Why Cadence Design Systems Inc Rallied Today

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 Cadence Design Systems Inc (NASDAQ: CDNS  ) climbed 2% today after Needham upgraded the semiconductor IP company from hold to buy.

So what: Along with the upgrade, analyst Richard Valera planted a price target of $16 on the stock, representing about 14% worth of upside to yesterday's close. While momentum traders might be turned off by Cadence's sharp decline over the second half of 2013, Valera believes much of the downside risk is now factored into the valuation.

Now what: According to Needham, Cadence's risk/reward trade-off is pretty attractive at this point: "The concerns we cited in our recent downgrade of CDNS shares -- namely a premium multiple to SNPS and risk around the likely resetting of 2014 consensus estimates -- have been addressed by the recent underperformance of CDNS shares vs. [Synopsis] and [Mentor Graphics] and a meaningful cut to 2014 Street estimates post the 3Q earnings call."

Needham continued: "We now believe CDNS 2014 consensus estimates are at a level that the company can likely meet, if not beat." With the stock still off about 10% from its 52-week highs and trading at a P/E of 9, it's tough to disagree with Needham's call on Cadence. 

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7/23/2014 3:59 PM
CDNS $16.93 Down -0.10 +0.00%
Cadence Design Sys… CAPS Rating: ***

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