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 Big Lots (NYSE:BIG) gained about 1% on Monday after FBR Capital upgraded the closeout retailer from market perform to perform.
So what: Along with the upgrade, analyst Dutch Fox boosted his price target to $45 (from $35), representing about 25% worth of upside to Friday's close. So while contrarians might be turned off by the stock's recent strength, Fox's call suggests that Mr. Market's enthusiasm is quite justified and that there's even more room run.
Now what: According to FBR, Big Lots' risk/reward trade-off remains pretty attractive at this point. "[W]e believe that (1) the turnaround is clearly under way, (2) management was remarkably adept at managing the business during a terrible holiday season, (3) the company's outlook is very achievable, (4) the core U.S. stores' earnings power is under-appreciated by the Street, and (5) FCF and valuation should protect the downside," said Fox. "The next catalysts for the stock are 1Q14 earnings in May and the newly announced June analyst day." Given Big Lots' still-questionable competitive moat and financial strength, however, I'd wait for a much wider margin of safety before betting on them.
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.