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 Frontier Communications (NASDAQ:FTR) slipped slightly in premarket trading Friday after Jefferies downgraded the communications company from buy to hold.
So what: Along with the downgrade, analyst Mike McCormack reiterated his price target of $6, representing just 5% worth of upside to yesterday's close. So while momentum traders might be attracted to Frontier's year-to-date price strength, McCormack's call could reflect a sense on Wall Street that its recent turnaround progress is now largely baked into the valuation.
Now what: According to Jefferies, Frontier's risk/reward trade-off is pretty balanced at this point. "We are downgrading shares of FTR from Buy to Hold as we see limited upside to our $6 price target following recent share outperformance (+41.2% LTM vs. the S&P +20.6%), which reflected an improving fundamental story, a market rotation to value-oriented names, and the potential for favorable tax legislation," said McCormack. "Shares now trade above historic EV/EBITDA levels while the dividend yield spreads relative to peers and treasuries are near lows." When you couple that seemingly stretched valuation with Frontier's still-hefty debt load, it's tough to disagree with Jefferies' cautiousness.
Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.