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Why SunTrust Banks Inc. Shares Could Stall

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 SunTrust Banks  (NYSE: STI  ) slipped nearly 1% in pre-market trading Tuesday after Evercore Partners downgraded the bank holding company from overweight to equal weight.

So what: Along with the downgrade, analyst John Pancari reiterated his price target of $40, representing just 2% worth of upside to yesterday's close. So while momentum traders might be attracted to SunTrust's price strength over the past year, Pancari's call could reflect a sense on Wall Street that the risks surrounding the company's net interest margin, or NIM, are being largely overlooked.

Now what: According to Evercore, SunTrust's risk/reward trade-off is particularly unappealing at this point. "STI reported a mixed 2Q marked by stronger loan growth, lower LLP, and better expenses, but also a weaker NIM," said Pancari. "Bottom line: While we are encouraged by STI's strengthening loan growth and well-contained expenses, EPS growth is limited by prevailing NIM headwinds. Such pressure results in a downside revision to our already conservative NIM outlook, and poses risk to Street EPS ests." When you couple that downbeat view with SunTrust's industry-topping P/E of 16, it's tough to disagree with Evercore's cautious stance.

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  • Report this Comment On July 22, 2014, at 9:43 PM, rsinj wrote:

    Your view as well as Evercore's are extremely short-sighted. Earnings beat estimates by a wide margin and that results in a downgrade? As far as NIM, most investors realize interest rates are headed higher - NIM will only improve going forward. STI shares are a buy at current price, strong buy at $35.

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Brian Pacampara

I take a look at big 10% moves, as well as stock-shaking analyst calls, on a daily basis for The Fool. While I don't believe in active trading, closely monitoring Mr. Market's mood swings can help identify long-term opportunities.

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SunTrust Banks, In… CAPS Rating: ***