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 the reasoning behind the call makes sense.
What: Shares of ACE closed down 2% yesterday after Miller Tabak downgraded the property and casualty insurer from buy to hold.
So what: Along with the downgrade, analyst Tom Mitchell lowered his price target on the stock to $91.50 (from $96.35), suggesting that he sees very limited upside at these levels. The stock has outperformed many of its peers over the past year on strong earnings growth, but Mitchell believes several factors will likely work to close that valuation gap going forward.
Now what: Miller Tabak sees headwinds for the industry in 2014 and also expects ACE to trade more in line with it.
The industry -- and ACE -- has so far enjoyed very modest catastrophe claims costs in 2013, a condition which both enhances current earnings and promises the potential for more new capital to enter the market and, in some lines, stimulate the migration of rate competition from 'CAT' coverages to other underwriting areas. These market conditions strongly suggest to us that ACE, having achieved a premium equity valuation vs. its peers, will trend toward matching the group's overall returns unless or until events causing more severe underwriting losses draw fresh attention to ACE's superior underwriting disciplines.
With ACE shares still up more than 20% from their 52-week lows and trading at a clear price-to-book premium to the industry, it's tough to argue with Miller Tabak's downgrade.
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The article Why ACE Might Be Poised for a Pullback originally appeared on Fool.com.Fool contributor 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.