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 Abercrombie & Fitch (ANF 3.68%) rallied 3% this morning after Jefferies upgraded the apparel retailer from hold to buy.
So what: Along with the upgrade, analyst Randal Konik boosted his price target to $50 (from $37), representing about 36% worth of upside to yesterday's close. So while momentum traders might be turned off by Abercrombie's price slump over the past year, Konik's call could reflect a growing sense on Wall Street that the company's turnaround prospects are becoming too cheap to pass up.
Now what: According to Jefferies, Abercrombie's risk/reward trade-off is rather attractive at this point. "Amidst a tough retail backdrop, mgmt has taken numerous actions of late that we believe position the company very well for significant operating margin expansion (at least 300 bps over the next few years from 5.4% in FY'14) and EPS growth as brand credibility is restored and sales recover," said Konik. "Accordingly, we think current valuation represents an attractive entry point." With Abercrombie continuing to boast a solid balance sheet and cheapish forward P/E, the downside certainly seems limited enough to bet on.
