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 Dollar General Corp. (NYSE: DG ) slipped about 1% this morning after Wells Fargo downgraded the discount retailer from outperform to market perform.
So what: Along with the downgrade, analyst Matt Nemer lowered his valuation range to $55-$58 (from $59-$63), representing as much as 5% worth of downside to yesterday's close. While contrarians might be attracted to Dollar General's share-price weakness in recent months, Nemer thinks that the upside remains limited, given his view of a weakening environment for the low-end consumer.
Now what: According to Wells, Dollar General's risk/reward trade-off is relatively unattractive at this point. "[T]he environment for the low-end consumer continues to deteriorate causing discretionary weakness that is impacting both sales and gross margin, and we see increasing likelihood FDO could pursue strategic alternatives that we view as a shorter-term negative for DG," noted Nemer. When you couple those headwinds with Dollar General's near-20 P/E, it's tough to disagree with Wells' cautious stance.
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