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 Xerox Corp (XRX) traded sluggishly today after Citigroup downgraded the document management technologist from buy to neutral.
So what: Along with the downgrade, analyst Jim Suva reiterated his price target of $13, representing just 5% worth of upside to yesterday's close. So while momentum traders might be attracted to Xerox's price strength over the past year, Suva's call could reflect a sense on Wall Street that its growth prospects are baked well into the valuation.
Now what: According to Citi, Xerox's risk/reward trade-off is pretty balanced at this point. "To be clear, we applaud XRX's continued efforts to transform itself to a services related organization (with services now representing more than 55% of total revenues) given secular challenges in print hardware, FCF generation and shareholder returns (7% including buybacks and dividends)," said Suva, "but at current multiples we believe the shares are adequately valued and reflect near terms risks associated with the loss of these contracts and implementing a large contract in a newer state which tends to have high initial start-up costs." With Xerox shares up more than 35% from their 52-week lows and trading at a lofty PEG above 1.5, holding out for a wider margin of safety certainly seems prudent.
