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 Restoration Hardware Holdings (NYSE:RH) gained 2% today after Bank of America/Merrill Lynch upgraded the home-furnishings retailer from neutral to buy.
So what: Along with the upgrade, analyst Lorraine Hutchinson boosted her price target to $110 (from $85), representing about 26% worth of upside to yesterday's close. So while contrarian traders might be turned off by Restoration's sharp climb in recent weeks, Hutchinson's call could reflect a sense on Wall Street that the company's growth prospects still aren't fully baked into the valuation.
Now what: B of A expects Restoration Hardware to grow its bottom line at a 30% compounded annual rate over the next three years. "We think that RH has very significant growth potential, driven by a real estate transformation and successful category extensions," said Hutchinson. "This trajectory is even more impressive given the dearth of growth stories in today's challenged retail landscape." Of course, when you couple Restoration's still-hefty debt load with its lofty 30-plus forward P/E, conservative Fools might want to hold out for a wider margin of safety before buying into that bullishness.
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.