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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Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.