Money managers are skeptical, says Al Root. Some see them as nothing more than marketing tools for the brokerage industry.
From this week’s issue ($):
When thinking about a stock, the question ultimately comes down to: What is it worth?
That’s what every Wall Street analyst tries to answer by giving a price target—or where the stock is expected to be in, typically, 12 months’ time—when preparing a research report on a particular company. Stock-price targets are quoted on television and cited in Barron’s and elsewhere…
But a target may not always be so useful for stock-price forecasts. Many professional money managers say they’re skeptical that it’s anything more than a marketing tool for the brokerage industry to generate interest in a stock. Indeed, Barron’s found 28 stocks in the S&P 500 index with a Buy rating (or its equivalent) and a price target below current levels, including Deere (DE), Walmart (WMT), Costco (COST), and Abbott Laboratories (ABT).
My take: Welcome to my world. Loved this paragraph:
Methods to reach a price target can include: a sum-of-the-parts analysis, discounted cash flow, mergers-and-acquisitions potential, expected value scenario planning, price-to-book value, replacement cost analysis, P/E, price-to-cash-flow, Ebitda (earnings before interest, taxes, depreciation, and amortization) multiples, sales multiples, and PEG (price/earnings to growth) ratios, among others. Investors should, at a minimum, understand how analysts derive their price target and, of course, what those terms actually mean.