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 American International Group Inc (NYSE:AIG) slipped about 2% in premarket trading after Deutsche Bank downgraded the insurance gorilla from buy to hold.
So what: Along with the downgrade, analyst Joshua Shanker lowered his price target to $55 (from $58), representing about 9% worth of upside to yesterday's close. So while momentum traders might be attracted to the stock's strength during the past year, Shanker's call suggests growing sentiment on Wall Street that AIG's valuation is a bit stretched.
Now what: According to Deutsche, AIG's risk/reward trade-off is pretty balanced at this point. "Management indicates that Fuji unit integration costs will keep expenses high through 2014, which suggests that core ROE may stagnate at around 6% for the foreseeable future," said Shanker. "While we believe cash flow will ultimately exceed core and GAAP EPS, we believe incremental buyers will need to see additional combined ratio improvement to be motivated to purchase AIG stock." Of course, with AIG still trading at a reasonable P/E of eight and price-to-book of 0.7, long-term investors might want to take Deutche's downgrade with a grain of salt.
Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: long January 2016 $30 calls on American International Group. 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.