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 Cummins (NYSE:CMI) climbed 3% this morning after Wells Fargo upgraded the diesel and natural gas engine manufacturer from market perform to outperform.
So what: Along with the downgrade, analyst Andrew Casey boosted his valuation range to $168-$171 (from $133-$136), representing as much as 31% worth of upside to yesterday's close. While momentum traders might be turned off by the stock's year-to-date pullback, Casey thinks Cummins is too cheap to pass up given its strong growth, margin enhancement, and capital redeployment opportunities.
Now what: According to Wells, Cummins' risk/reward trade-off is particularly juicy at this point.
"Based on likely completion of multiple year cycle of guidance cuts, anticipated positive inflection in end market demand, above market growth (driven by content gain, share gain and distribution consolidation), improved cost structure and sustained capital redeployment to shareholders including management's 2014 commitment to return $1 billion to shareholders (i.e., $5.40 or 4.1% yield through dividend/share repurchase), we are upgrading the shares to Outperform from Market Perform," noted Casey.
When you couple those strong tailwinds with Cummins' cheapish forward P/E of 12, it's tough to disagree with Wells' bullishness.
Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Cummins and Wells Fargo. The Motley Fool owns shares of Cummins and Wells Fargo. 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.