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 Applied Materials, (NASDAQ:AMAT) rallied 3% today after Jefferies initiated coverage on the chip equipment giant with a buy rating.
So what: Along with the bullish call, analyst Sundeep Bajikar planted a price target of $28 on the stock, representing about 36% worth of upside to yesterday's close. So while contrarian traders might be turned off by Applied's price strength over the past year, Bajikar's call could reflect a sense on Wall Street that its expansion prospects still aren't fully baked into the valuation.
Now what: According to Jefferies, Applied's risk/reward trade-off is rather attractive at this point. "We are confident the merger [with Tokyo Electron] would complete in 2H14, and translate into increased pricing power and scale benefits," Bajikar said. "We believe AMAT is best positioned among SemiCap players to benefit from a combination of 1) industry consolidation, 2) technology inflections, and 3) foundry competition. We expect higher margins and cash returns to drive multiple expansion." Applied shares hit a new 52-week high today and are trading at a P/E of 30, however, I'd hold out for a wider margin of safety before betting on those expectations.
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.