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 ResMed (NYSE:RMD) slipped 1% today after Deutsche Bank downgraded the medical equipment distributor from buy to hold.
So what: Along with the downgrade, analyst David Low reiterated his price target of $52, representing just 3% worth of upside to yesterday's close. So while momentum traders might be attracted to ResMed's year-to-date price strength, Low's call could reflect a sense on Wall Street that the regulatory risks surrounding its growth trajectory are being largely overlooked.
Now what: According to Deutsche, ResMed's risk/reward trade-off isn't too appealing at this point. "The Centers for Medicare & Medicaid Services (CMS) has issued a release to update among other things, details of the roll-out of Competitive Bidding (CB) round 3 and the phase in of special payment rules (i.e. "bundled funding")," said Low. "While there is the possibility the proposals will be knocked back, if implemented, the near term impact will likely be modest given bundled funding will only to be implemented in 12 areas. However, in the medium term this reform could materially slow mask sales growth if implemented widely (i.e. followed by private payors)." When you couple that seemingly real risk with ResMed's 20-plus P/E, it's tough to disagree with Deutsche's cautious stance.