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 E TRADE Financial Corporation (NASDAQ:ETFC) climbed about 2% yesterday morning after Wells Fargo upgraded the discount brokerage from market perform to outperform.
So what: Along with the upgrade, analyst Christopher Harris raised his valuation range to $25-$28 (from $21-$24), representing as much as 29% worth of upside to yesterday's close. So while momentum traders might be turned off by E TRADE's price pullback in recent weeks, Harris' call could reflect a growing sense on Wall Street that its long-term growth potential is becoming too cheap to pass up.
Now what: According to Wells, E TRADE's risk/reward trade-off is rather attractive at this point. "We aren't making a call on the quarter per se but instead see notable long-term upside in EPS stemming from excess capital generation at ETFC's bank," said Harris. "We also think there could be near-term upside from (1) better credit outcomes in ETFC's loan book and (2) PFOF fears subsiding." When you couple the stock's steep-ish forward P/E of 18 with its highly volatile nature, however, I wouldn't be so quick to bet on it.
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Brian Pacampara has no position in any 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.