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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 Baker Hughes Incorporated (NYSE: BHI ) climbed more than 1% in premarket trading Monday after Goldman Sachs upgraded the oilfield services specialist from neutral to buy.
So what: Along with the upgrade, analyst Waqar Syed boosted his price target to $72 (from $60), representing about 17% worth of upside to Friday's close. So while contrarians might be turned off by the stock's strength in recent months, Syed's call indicates strengthening optimism on Wall Street over Baker Hughes' operating tailwinds.
Now what: According to Goldman, Baker Hughes' risk/reward trade-off is rather attractive at this point. "We upgrade BHI to Buy as we believe it should benefit from our expectation of increases in E&P capital spending and a recovery of pricing power in the pressure pumping market," noted Syed. "BHI is targeting raising its [North American] margins to mid-teens by 2H/2014. We have been skeptical about BHI's ability to reach those targets, but now that rig activity is stronger than expected and pressure pumping prices could go higher, we believe that BHI may have the tailwind to reach those targets." When you couple those positive trends with the stock's cheapish forward P/E of 12, it's tough to disagree with Goldman's upgrade.
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