While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of American Electric Power Company Inc (NYSE:AEP) opened sluggishly on Monday after Jefferies downgraded the electricity utility from buy to hold.
So what: Along with the downgrade, analyst Paul Fremont lowered his price target to $50 (from $52.50), representing about 2% of upside to Friday's close. So, while momentum traders might be attracted to the stock's strength over the past six months, Fremont's call could reflect a growing sense on Wall Street that American Electric's valuation is a bit stretched at this point.
Now what: According to Jefferies, American Electric's risk/reward trade-off is pretty balanced at this point. "When we upgraded the stock back in February 2012, it was trading at an 18% discount to the group average, and since then, management has closed the gap through rate increases/cost reductions and the stock is trading at a slight discount," said Fremont. "Jefferies believes that any sale of the Genco is unlikely before 2015."
With the stock still sporting a 4%-plus dividend yield, however, that short-term uncertainty might be providing patient Fools with a solid income opportunity.
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Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.