Why Office Depot Inc. Shares Could Fly 40%

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Office Depot  gained 3% today after Goldman Sachs upgraded the office products retailer from neutral to buy.

So what: Along with the upgrade, analyst Matthew Fassler planted a price target of $7 on the stock, representing about 39% worth of upside to Friday's close. So while contrarians might be turned off by Office Depot's price strength in recent weeks, Fassler's call could reflect a sense on Wall Street that the company's margin expansion potential still isn't fully baked into the valuation.

Now what: According to Goldman, Office Depot's risk/reward trade-off is rather attractive at this point. "We see a significant opportunity for ODP to deliver impressive earnings growth in 2014-2016 from the merger integration and a broader cost-cutting initiative, off an exceptionally low margin base," said Fassler. "The firm cleanly beat its first quarter post-merger, and we think the Street has not followed through with sufficiently aggressive earnings forecasts." Of course, when you couple the gale force competitive headwinds still facing Office Depot with its recent price strength, long-term Fools are probably better off on the sidelines. 

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The article Why Office Depot Inc. Shares Could Fly 40% originally appeared on Fool.com.

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.

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