While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Veeco Instruments (NASDAQ:VECO) sank 5% today after Oppenheimer downgraded the LED equipment maker from outperform to perform.
So what: Along with the downgrade, analyst Andrew Uerkwitz removed his price target of $42, suggesting that he sees limited upside and possibly even some downside from Veeco's current levels. The stock has rallied nicely over the past year on better-than-expected demand, but Uerkwitz believes that investors might be underestimating a couple of looming risks.
Now what: Although Oppenheimer expects Veeco to continue to gain market share, it sees two main sources of short-term uncertainty. "First is potential fallout from the revenue recognition issue the company has been battling with for nearly a year. Second, we expect an earnings correction when it reports," Oppenheimer cautioned. "While both were previously known to us, we believed a resolution to the accounting issue would have been resolved by now, but after updating our financial statements, the earnings correction is more severe than we previously thought." When you combine those negative catalysts with the stock's forward P/E of 28, I'd have to agree that Veeco's risk/reward trade-off seems rather unfavorable.
Fool contributor 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.