Why Vale SA Might Be Ready to Rebound

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 Vale SA rallied 2.5% today after Morgan Stanley upgraded the iron ore gorilla from equal-weight to overweight.

So what: Along with the upgrade, analyst Carlos De Alba boosted his price target to $18 (from $17.50), representing about 32% worth of upside to yesterday's close. While momentum traders might be turned off by the stock's sharp decline during the past year, De Alba thinks that Vale is too juicy to pass up given the margin-enhancement opportunities management has available.

Now what: According to Morgan Stanley, Vale's risk/reward trade-off is particularly attractive at this point. "We forecast Vale's ROE will improve to 16% in 2014 from 10% in 2013, supported by management efforts to divest non-core assets and reduce costs," noted De Alba. "The stock has underperformed other major miners by 18% in LTM and we believe such underperformance is unlikely to continue." When you couple Vale's operating improvement prospects with its cheapish forward P/E of 6.5, it's tough to disagree with Morgan's bullish stance.

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The article Why Vale SA Might Be Ready to Rebound originally appeared on Fool.com.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. 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.

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