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 analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of On Assignment (NYSE:ASGN) climbed 4% yesterday after Wells Fargo upgraded the professional contract firm from market perform to outperform.
So what: Along with the upgrade, analyst Ed Caso boosted his price target to $41-$43 (from $34-$35), representing as much as 17% worth of upside to yesterday's close. So while contrarians might be turned off by the stock's strength over the past year, Caso's call suggests that much of On Assignment's growth potential still isn't baked into the valuation.
Now what: According to Wells, On Assignment's risk/reward trade-off is rather attractive at this point. "We believe On Assignment is well positioned for above-market growth and gross margin due to its focus on the attractive IT (80-85% of revenue) and health care and life sciences (15-20% of revenue) markets," said Caso. "We see the potential for steady EBITDA margin expansion over time given extension of permanent placement work and systems integration." Of course, with On Assigment shares now up about 75% from their 52-week lows and trading at a steep-ish P/E of 25, I'd wait for a wider margin of safety before betting on it.