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 Exelon (NYSE: EXC ) gained nearly 1% in pre-market trading Tuesday after Jefferies upgraded the utility services company from hold to buy.
So what: Along with the upgrade, analyst Paul Fremont boosted his price target to $42.50 (from $37.50), representing about 18% worth of upside to yesterday's close. So while contrarian traders might be turned off by Exelon's year-to-date price strength, Fremont's call could reflect a sense on Wall Street that sector tailwinds give the stock plenty of room to run.
Now what: According to Jefferies, Exelon's risk/reward trade-off is rather attractive at this point. "The improvement in power prices since the end of April appears sustainable based on recent commodity forward price updates," said Fremont. "At higher power prices the level of supply contribution has shrunk from 25% of forecast EBITDA to 15% warranting a lower P/E discount on the stock." When you couple that upbeat outlook with Exelon's still-juicy 3.5% dividend yield, it's tough to disagree with Jefferies' upgrade.
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