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 PetSmart (PETM) fell 3% on Tuesday after Bank of America downgraded the pet products retailer from neutral to underperform.
So what: Along with the downgrade, analyst Denise Chai lowered her price target to $60 (from $77), representing about 14% worth of downside to yesterday's close. So while value investors might be attracted to PetSmart's sluggish price action over the past year, Chai's call could reflect a growing sense on Wall Street that its risks remain largely overlooked.
Now what: According to B of A, PetSmart's risk/reward trade-off is rather unattractive at this point. "In addition to our concerns that PETM was losing share to Petco, TSCO and independents while facing adoption headwinds, we now believe that its core product category, super premium natural pet food, may be at risk from 1) the potential introduction of natural food in the mass channel, which would hurt sentiment and PETM's valuations and 2) increasing dependence on Blue Buffalo, which could alienate customers loyal to other brands which have lost shelf space in PETM's latest reset," said Chai. "Given a more cautious outlook, we are reducing our ests: 2014/15/16E is $4.40/4.90/5.41 ($4.48/5.07/5.67 prior)." Of course, when you couple PetSmart's still-solid competitive position with its forward P/E in the low teens, that bearishness might be providing patient Fools with a solid long-term opportunity.
