Barron’s: Do Wall Street Stock Price Targets Really Matter?

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.  

7 Comments

  1. David Emery said:

    “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”

    Does this count as schadenfreude for Apple and AAPL investors? Or is it just “the way it is”? Either way, it begs the question, “Why are those clowns still in business?”

    1
    July 3, 2019
  2. Gregg Thurman said:

    Can’t believe that an “insider”, someone dependent on WS for rumors and such, wrote this. Refreshing.

    2
    July 3, 2019
  3. David Drinkwater said:

    In addition to being “marketing tools”, I think they can sometimes be little more than click-bait (which indirectly can work nicely as a marketing tool).

    1
    July 3, 2019
  4. Aaron Belich said:

    New numbers based on calculations that include fake numbers are also fake numbers.

    0
    July 3, 2019
  5. Fred Stein said:

    In almost all cases, it is a con game. The target and the long report prop up the notion that the old, large, expensive brokerages have special knowledge. Like all con games, you’re led to believe that you can beat the odds by trusting the con man.

    Katy Huberty is the only exception I know of. She shows a real DCF with data and logic to support it. Plus she models best and worst cases based on scenarios that could happen.

    The best sources are Asymco’s Horace Dediu and Warren Buffett. Horace explains why Apple can perform well for years regardless of short term conditions or black swan events. Warren makes the same statement with his check book and simple homilies. Plus Warren chuckles at the naysayers.

    0
    July 3, 2019
    • Gregg Thurman said:

      “Katy Huberty is the only exception I know of.”

      Shannon Cross is another. Her questions during conference calls always seem to be the most intelligent. Her firm Cross Research is privately and doesn’t engage in “quote of the day” marketing. I’ve never seen her on CNBC (which doesn’t mean she hasn’t been) and that’s a plus in my mind.

      1
      July 4, 2019

Leave a Reply