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Pacific Crest analyst Steve Weinstein Thursday morning upped his rating on Yahoo (NASDAQ:YHOO) to Outperform from Sector Perform, citing signs of recovery in the online display advertising sector. His price target on the stock is $20.

Weinstein writes in a research note that a survey of online media professionals finds overall Q2 online ad spending on track to be flat with a year ago. That compares with a 5% year over year drop in Q1. He says the shift reflects an improvement in display ads, with little change in search. He notes that display ads are expected to be flat versus a year ago, after dropping about 10% year over year in the first quarter.

“The uptick is spending reflects a modest increase in optimism, a need to drive sales and an accelerated shift in budgets away from other forms of media, especially print,” he writes. “Visibility remains low; however, barring a significant shock to the economy, we would be surprised if display were not flat to up modestly in the second half of the year, given the easier comparisons in the second half.”

Weinstein asserts that demand for premium inventory for major branding campaigns remains low, but that second-tier inventory is attractive advertisers and is growing. “Although pricing on second-tier inventory continues to fall, ample supply is allowing for an absolute increase in dollars spent,” he writes. “While this creates an obvious headwind for Yahoo and other tier-one inventory providers, we believe that the positives of a stable-to-recovering market are more significant.”

Despite the upgrade, YHOO Thursday is down 19 cents, or 1.2%, to $16.11.

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Source: Yahoo Upgraded on Q2 Pick Up in Ad Spending