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 analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Dollar General (NYSE:DG) slumped about 2% today after Deutsche Bank downgraded the discount retailer from buy to hold.
So what: Along with the downgrade, analyst Paul Trussell lowered his price target to $60 (from $65), representing about 7% worth of upside to yesterday's close. So while contrarian traders might be attracted to Dollar General's year-to-date price weakness, Trussell's call could reflect a sense on Wall Street that the retailer's growth prospects are just too limited to trigger a significant rebound.
Now what: According to Deutsche, Dollar General's risk/reward trade-off is rather unattractive at this point. "DG remains one of the best managed companies in retail with a long track record of success; however, heading into 1Q we are concerned that the stock may be unable to outperform this year as numerous headwinds impact results," said Trussell. "The biggest challenge, in our view, is for DG to grow SSS 3-4% while maintaining flat to up GPM (ex. Tobacco) given a sharp pricing environment driven by WMT, TGT, and now FDO as well." When you couple that intense competitive pressure with Dollar General's still-hefty debt load, it's tough to disagree with Deutsche's bearishness.
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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.