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 The Gap (GPS 0.55%) gained almost 1% in premarket trading after Canaccord Genuity upgraded the apparel retailer from hold to buy.
So what: Along with the upgrade, analyst Laura Champine boosted her price target to $51 (from $47), representing about 24% worth of upside to yesterday's close. So while momentum traders might be turned off by Gap's price sluggishness over the past year, Champine's call could reflect a sense on Wall Street that its growth prospects are becoming too cheap to pass up.
Now what: According to Canaccord, Gap's risk/reward trade-off remains particularly attractive. "We believe the omni-channel and supply chain initiatives GPS is executing will drive greater long-term margin expansion than we had previously forecast," said Champine. "The company is introducing new online services that we believe can improve traffic and conversion rates both online and in stores. At the same time, the transition to a more responsive supply chain should enable GPS to reduce costs, shorten lead times, and provide a more consistent trend-right assortment." When you couple that upbeat outlook with Gap's cheapish forward P/E of 12, it's easy to understand Canaccord's bullishness.
