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 Angie's List (ANGI) surged 7% in pre-market trading Friday after Bank of America upgraded the local services review site from neutral to buy.
So what: Along with the upgrade, analyst Paul Bieber reiterated his price target of $16, representing about 60% worth of upside to yesterday's close. So while momentum traders might be turned off by Angie's sharp decline over the past year, Bieber's call could reflect a sense on Wall Street that the company's long-term growth prospects are becoming too cheap to pass up.
Now what: According to Bank of America, Angie's risk/reward trade-off is particularly attractive at this point. "We think stabilizing ARPU, constructive penetration trends, and improving sales force productivity could drive improved sentiment (29% of shares are short) and increased confidence in the model," said Bieber. "Also, Street estimates are now lower (a reason for our Feb. downgrade), and with the stock down 33% YTD (vs. Nasdaq +3%) and with 60% upside potential to our PO, we think the stock is more attractively valued." When you couple Angie's still-questionable competitive position with its 40-plus price-to-cash flow multiple, however, I'd hold out for an even wider margin of safety before betting on that bullishness.
