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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