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 Applied Materials (AMAT 2.09%) climbed 1% in premarket trading Thursday after Nomura Securities initiated coverage on the chip-equipment giant with a buy rating.
So what: Along with the bull call, analyst Romit Shah planted a price target of $30 on the stock, representing about 55% worth of upside to yesterday's close. So while contrarians might be turned off by the stock's strength over the past year, Shah's call suggests that the tailwinds working in Applied's favor aren't letting up anytime soon.
Now what: According to Nomura, Applied's risk/reward trade-off is pretty attractive at this point. "The Street is preoccupied with the company's outlook for WFE spending of $37bn in 2017 and, in our view, underestimating earnings power over the next two years," said Shah. "Additionally, we see operating synergies and a lower tax rate should meaningfully boost FCF from ~60% to roughly 75%-80%." When you couple that upbeat view with Applied's still-reasonable forward P/E of 14, it's tough to disagree with Nomura's bullish stance.
