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 ResMed (NYSE:RMD) slipped 1% today after Northland Capital downgraded the medical equipment distributor from market perform to underperform.
So what: Along with the downgrade, analyst Suraj Kalia reiterated his price target of $40, representing about 20% worth of downside to Friday's close. So while momentum traders might be attracted to ResMed's price strength in recent months, Kalia's call could reflect a sense on Wall Street that the company's operating risks are being largely overlooked.
Now what: According to Northland, ResMed's risk/reward trade-off is rather unattractive at this point. "Our recent checks in the CPAP space highlight numerous forces that will, over time, work in concert to squeeze margins and top-line growth," said Kalia. "As we have said in our initiation report (10/07/13), ResMed's model is highly sensitive to operating margins, and every 100 bps reduction in margins reduces equity value/share by $2. We believe consensus forward estimates, especially margin profiles are unrealistic." When you couple that downbeat view with ResMed's steep-ish 20-plus P/E, it's tough to disagree with Northland's bearishness.
Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.