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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.
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