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Why Family Dollar Stores, Inc. Will Keep Pulling Back

By Brian Pacampara – Jan 16, 2014 at 3:04PM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

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 Family Dollar Stores, Inc. (FDO.DL) slipped slightly on Thursday after Raymond James downgraded the discount retailer from market perform to underperform.

So what: Along with the downgrade, analyst Dan Wewer planted a valuation range of $49 to $54 on the stock, representing as much as 25% worth of downside to yesterday's close. While value investors might be attracted to Family Dollar's share-price weakness in recent months, Wewer believes there's plenty of room to fall given the company's still-expensive valuation relative to close peers.

Now what: According to Raymond James, Family Dollar's risk/reward trade-off remains pretty unattractive at this point. "Despite reporting disappointing F1Q14 results and issuing sharply lower FY14 guidance on January 9 -- FDO is down only ~1% since," Wewer noted. "In our view, FDO shares should trade at a discount to its competitors given its historically inferior sales productivity and the sizable headwinds it faces over the next several quarters." With Family Dollar shares still up about 20% from their 52-week lows and trading at a near-20 P/E, waiting for a wider margin of safety certainly seems prudent.

Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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