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 Dow Chemical (NYSE:DOW) gained about 1% today after Wells Fargo upgraded the chemical giant from market perform to outperform.
So what: Along with the upgrade, analyst Frank Mitsch raised his price target to $54-$56 (from $48-$52), representing about 13% worth of upside to yesterday's close. So while contrarian traders might be turned off by Dow's price strength over the past year, Wells' call could reflect a sense on Wall Street that the company's growth prospects still aren't fully baked into the valuation.
Now what: According to Wells, Dow's risk/reward trade-off is rather attractive at this point. "After visiting with senior leaders at HQ in Midland, MI, we are raising our estimates for 2014 (net of $0.06 per share impact from Q2 cracker outages) from $2.75 to $2.85," said Mitsch. "For 2015, putting more weight in contributions from PDH and Sadara leads us to raise our outlook from $3.20 to $3.50. Given our more-constructive outlook on DOW's earnings, the lag in stock appreciation relative to peers, and a more-favorable valuation on our estimates, we are upgrading from Market Perform to Outperform." When you couple that bullish view with Dow's still-attractive dividend yield of 3%, it's tough to disagree with Wells' upgrade.
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.