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 Panera Bread Co. (NASDAQ:PNRA.DL) slipped about 2% in premarket trading Wednesday after Wunderlich Securities downgraded the bakery-cafe operator from buy to hold.
So what: Along with the downgrade, analyst Robert Derrington lowered his price target to $190 (from $205), representing about 5% worth of upside to yesterday's close. While momentum traders might be attracted to Panera's share-price strength during the past six months, Derrington's call could reflect a growing sense on Wall Street that its valuation is becoming a bit stretched.
Now what: According to Wunderlich, Panera's risk/reward trade-off is pretty balanced at this point. " Derrington said:
Yesterday at its Investor Day, management detailed its "Path Forward" plan to sustain the success its iconic café has enjoyed for more than a decade. While that plan ultimately is expected to contribute to stronger SSS, margins are guided lower and EPS is more lumpy and less predictable as management suspended its 15-20% longer-term EPS guidance. Given its expected more-volatile operating performance, we prefer to take a more cautious wait-and-see approach with our investment.
Given Panera's rock-solid balance sheet and still-reasonable forward P/E in the low 20s, however, long-term Fools might want to take Wunderlich's downgrade with a big grain of salt.
Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Panera Bread. The Motley Fool owns shares of Panera Bread. 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.