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 Five Below (NASDAQ:FIVE) climbed 2% today after Stern Agee upgraded the value retailer from neutral to buy.
So what: Along with the upgrade, analyst Charles Grom boosted his price target on the stock to $56 per share (from $44), representing about 20% worth of upside to yesterday's close. While value investors might be turned off by the stock's seemingly lofty price multiples, Grom believes that Five Below's flexible business model and attractive growth prospects are certainly worth paying up for.
Now what: Stern Agee thinks Five Below is a particularly attractive long-term opportunity. "While not necessarily a call on [near-term] trends, FIVE can play both offense (SSS/door growth/GPM levers) and defense (value, <$5 focus) with shades of both [Costco and Dollar Tree]," noted Stern Agee. "Valuation has been an obstacle for many, but over a multiyear period, FIVE has the potential to more than double its EPS ... few retailers can make that claim." Of course, with the stock up about 75% from its 52-week lows and trading at a forward P/E of 50, I'd wait for a wider margin of safety before betting on that potential.
Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. 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.
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