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 upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Hewlett-Packard (NYSE: HPQ ) gained 1% in pre-market trading Thursday after Goldman Sachs upgraded the information technology services giant from sell to neutral.
So what: Along with the upgrade, analyst Bill Shope boosted his price target to $32 (from $25), representing about 5% worth of downside to yesterday's close. So while contrarian traders might be turned off by HP's sharp rebound over the past six months, Shope's call could reflect a sense on Wall Street that the rally is quite justified given management's effective execution of late.
Now what: According to Goldman, HP's risk/reward trade-off is much improved. "While our view on many of HP's end markets remains cautious, restructuring efforts have gone a long way toward 'right-sizing' the cost base, providing a sustained buffer to our secular concerns," said Shope. "Further, robust cash generation amid this period of change has been commendable and continues to outpace our expectations. While we are not yet comfortable assuming top line growth, we are more comfortable with the LT margin trajectory and are raising our FY14/FY15/FY16 EPS estimates to $3.70/$3.93/$4.06 from $3.64/$3.52/$3.60 previously." When you couple that upbeat outlook with HP's single-digit forward P/E, it's tough to disagree with Goldman's upgrade.
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