Why Gap Shares Sank

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 Gap sank 2% this morning after Jefferies downgraded the apparel retailer from "buy" to "hold."

So what: Along with the downgrade, analyst Randal Konik lowered his price target to $41 (from $51), representing just 2% worth of upside to yesterday's close. While momentum investors might be attracted to Gap's share-price climb over the past two years, Konik believes that tough comparable sales going forward will probably put pressure on the stock.

Now what: Jefferies now expects Gap to post EPS of $2.95 in 2014, down from its previous view of $3.05. "GPS has been one of our favorite names since mid-2011, as structural changes made over the last 2 years resulted in better merchandise, sales momentum and margin gains," noted Jefferies. "However, with comps now slowing and visibility on consumer patterns low as Gap gets more promotionally competitive for Holiday, we are concerned with the company's ability to drive SSS growth and margin expansion against difficult compares." Given Jefferies' risk/reward assessment on the stock, it's tough to disagree with the downgrade.

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The article Why Gap Shares Sank originally appeared on Fool.com.

Fool contributor Brian Pacampara and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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