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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 Diamond Offshore Drilling, Inc. (NYSE: DO ) gained slightly this morning after FBR Capital upgraded the offshore contract driller from underperform to market perform.
So what: Along with the upgrade, analyst Thomas Curran planted a price target of $45 on the stock, representing about 2% worth of downside to Friday's close. While Curran isn't exactly bullish on Diamond's near-term earnings upside, he thinks that the stock is becoming cheap enough to warrant some support from Mr. Market.
Now what: FBR lowered its 2014 EPS view for Diamond from $4.45 to $4.00 and its 2015 forecast from $5.95 to $5.60. "(1) DO's recent, renewed embrace of leverage has diminished the odds of another special dividend cut, in our view; and (2) the stock has declined to in line with our price target, which we believe garners increasing support from valuation metrics, especially NAV methodologies that incorporate backlog," noted Curran. "However, over the next 12 months, the focal time horizon for our rating, we think Diamond should continue to struggle with the forces of market bifurcation, which are exerting a structural squeeze on its earnings power." With the stock flirting with its 52-week lows and sporting a cheapish forward P/E of 7, however, those short-term concerns might be providing patient Fools with a juicy long-term energy play.
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