While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Dow Chemical (DOW) gained about 1% today after Wells Fargo upgraded the chemical giant from market perform to outperform.
So what: Along with the upgrade, analyst Frank Mitsch raised his price target to $54-$56 (from $48-$52), representing about 13% worth of upside to yesterday's close. So while contrarian traders might be turned off by Dow's price strength over the past year, Wells' call could reflect a sense on Wall Street that the company's growth prospects still aren't fully baked into the valuation.
Now what: According to Wells, Dow's risk/reward trade-off is rather attractive at this point. "After visiting with senior leaders at HQ in Midland, MI, we are raising our estimates for 2014 (net of $0.06 per share impact from Q2 cracker outages) from $2.75 to $2.85," said Mitsch. "For 2015, putting more weight in contributions from PDH and Sadara leads us to raise our outlook from $3.20 to $3.50. Given our more-constructive outlook on DOW's earnings, the lag in stock appreciation relative to peers, and a more-favorable valuation on our estimates, we are upgrading from Market Perform to Outperform." When you couple that bullish view with Dow's still-attractive dividend yield of 3%, it's tough to disagree with Wells' upgrade.
