Why Conn's Shares Rocketed Higher Wednesday

By Markets Fool.com

Image Source: Conn's.

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What happened

Shares of retailer Conn's (NASDAQ: CONN) soared on Wednesday following an analyst upgrade featuring a price target well above current levels. At 11:45 a.m., the stock was up more than 19%.

So what

Stifel Nicolaus upgraded Conn's from neutral to buy, with a price target of $16 -- nearly $10 higher than the stock's 52-week low and $4 higher than levels reached following the upgrade. Conn's surged earlier this month when it reported its second-quarter earnings, despite miserable results and guidance. The stock is now up about 72% over the past month.

Conn's stock has been on a downward trend since early 2014, when trouble in its credit business forced the company to tighten up its lending standards. Its credit business is still posting major losses, and the segment's net loss more than doubled year-over-year during the second quarter. Tighter lending standards have also led to a slump in comparable sales, a double whammy that has decimated Conn's profitability.

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CONN data by YCharts

Now what

Putting a value on Conn's is tough because its credit business remains such a mess. Unlike typical retailers, Conn's finances the bulk of its customers' purchases in-house. This setup blew up in Conn's face in recent years, and at this point, there's no sign that the situation is improving.

Stifel believes that the stock fell too far, and it may be right. But investors would be wise to fully understand the risks associated with Conn's credit portfolio before plunging into the stock.

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Timothy Green 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.