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 The Fresh Market (UNKNOWN:TFM.DL) sank 6% in pre-market trading Tuesday after Goldman Sachs downgraded the specialty food retailer from neutral to sell.
So what: Along with the downgrade, analyst Stephen Grambling lowered his price target to $27 (from $36), representing about 17% worth of downside to yesterday's close. So while contrarian traders might be attracted to Fresh Market's price weakness over the past year, Grambling's call could reflect a sense on Wall Street that the company's growth prospects are too limited to trigger a significant rebound.
Now what: According to Goldman, Fresh Market's risk/reward trade-off is pretty unappealing at this point. "The bottom-line is TFM is operating in a more competitive environment for specialty grocers that we expect will cap the top line and pressure margins long term," said Grambling. "In the near term, TFM is also facing incremental headwinds from the Affordable Care Act and protein inflation which we expect will drive earnings below guidance. ... We forecast an 11% EPS CAGR over the next three years driven by 3.5% comp growth and 55bp of cumulative EBIT margin pressure from gross margin compression and SG&A deleverage." Of course, with Fresh Market shares now off about 45% from their 52-week high and trading at a price-to-cash flow of 10, that downbeat view might provide patient Fools with a cheapish long-term opportunity.
Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market. 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.