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Sierra Wireless Inc. is Canada's hottest stock, but analysts and investors appear to be at odds over whether the rally is here to stay.

The company, which develops wireless technology for use in cars, smart meters and other applications, has seen its share price surge to $39.69, up 89 per cent in 2017.

That makes it the best-performing stock in the S&P/TSX composite index since the start of the year.

Most of the gains followed the release of surprisingly strong fourth quarter results in February. Analysts had been expecting a profit of 16 cents per share, but Sierra Wireless wowed them with a profit of 27 cents a share (after making some one-time adjustments).

The company also delivered encouraging news: It announced that Volkswagen AG had selected Sierra Wireless technology for its next-generation of connected cars – providing services such as remote vehicle access, roadside assistance and diagnostics.

Sure, Volkswagen has had its share of problems related to the recent emissions scandal. But this is a company valued at 69 billion euros and it sold more than 10 million vehicles last year, making it the world's largest producer by volume.

No wonder investors have been wildly enthusiastic about Sierra Wireless over the past six weeks. Curiously, though, analysts have been far more cautious on the stock, setting up a situation in which somebody could be making a big mistake.

The target price from a consensus of 12 analysts trails the current share price by a gargantuan 26 per cent. According to Bloomberg, the average target price is $29.40, or more than $10 below the current price.

It is not unusual for analysts and investors to have different opinions. But in most cases, analysts are the ones who tend to be bullish with target prices that are ahead of the current share price.

Consider two groups of stocks in the S&P/TSX composite index: The 10 stocks that have contributed the most to the benchmark index this year in terms of points, and a second group of 10 stocks that have enjoyed the biggest percentage rallies this year (we've excluded Sierra Wireless from this list).

Analysts who cover the first market-moving group have, on average, target prices that are 7 per cent above the current prices, which suggests they expect a decent rally over the next 12 months. In all 10 examples, which range from Royal Bank of Canada to Canadian National Railway Co. to Rogers Communications Inc., target prices were higher than the current price.

Analysts who cover the second group of stocks – those with the biggest percentage gains – are even more enthusiastic: Their target prices are 15 per cent higher than the current share price.

In this second group, there are three examples of analysts' targets trailing current share prices. But the differences are slim, ranging between 1 per cent and 9 per cent.

Sierra Wireless, then, stands out in a big way, raising the question of whether analysts are unduly cautious or investors are out of their minds by driving the stock to a valuation of 80-times trailing profit.

Perhaps investors sense a huge opportunity based on the Volkswagen deal, or see the company's better-than-expected fourth quarter profit as the start of a trend. And yes, it is entirely possible that analysts will recognize the rally and start raising their target prices.

Another possibility: Analysts are right to be cautious.

Thanos Moschopoulos, an analyst at BMO Nesbitt Burns, said in February – before the rally kicked in – that he had a "neutral" recommendation on the stock: "The company's improving outlook is already priced in," he said in a note.

Gus Papageorgiou, an analyst at Macquarie Securities, cut his recommendation two weeks ago to "underperform" from "neutral," citing concerns about the stock's valuation. He said in an earlier note: "The company's profitability remains low and much of the low-hanging fruit has already been picked."

This is a battle to watch, not join.

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