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 ResMed (RMD -1.82%) gained about 1% today after the medical equipment company posted strong quarterly results and received a hold-to-buy upgrade from Deutsche Bank.
So what: Along with the upgrade, analyst David Low raised his price target to $52 (from $48), representing about 11% worth of upside to yesterday's close. So while momentum traders might be turned off by ResMed's sharp pullback over the past six months, Low's 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 Deutsche, ResMed's risk/reward trade-off is particularly attractive at this point. "While the risk of further price pressure cannot be ruled out we believe a return to more normal pricing and demand conditions is likely post CB2 and ResMed's sales growth in FY15 will be boosted by its new product range and its move into non-invasive ventilation in the US," said Low. "The key risk to our thesis is the potential for further funding reforms (i.e. bundled pricing) but such a change would take a number of years to introduce (assuming private payors follow CMS) and in the interim the market should continue to grow given the positive secular trends." When you couple that upbeat outlook with ResMed's still-reasonable PEG of 1.3, it's tough to disagree with Deutsche's bullishness.
