Are Target Prices Important?
Certainly investors use Target prices to choose which stocks to buy but are analysts just throwing darts at a dart board when they pick these prices? The time horizon for these prices are also very suspect. Sometimes they are very long, sometimes they are not stated at all. Analysts should be much clearer in their target prices. Sometimes I see price targets change, from $200 to $202. This is when I think that this analyst must be pretty serious because the change is so minute. Then I see major changes from $200 to $260, which definitely seem to be very ballpark figures.
There is a local radio station that sets the daily high and the daily low for the day. If the temperature does not hit both the high and low at some point in the day, then one lucky listen will win the money prize. I stopped listening to that channel but the radio station almost always hit the high and the low. Each time it hit its target, it would add to the prize money for the next day. Eventually a lucky listener could win more than $10,000 from the consecutive streak that the forecasts were correct. However, you have to wonder that maybe the radio station is picking a low or a high that will be easy to hit and consequently risk the forecasts being less informative. For example, if they think that the weather could likely be as high as 100 degrees, they may say 95 in case they are wrong. I’d want to know that it is likely to be 100 degrees rather than thinking that it’s not going to get higher than 95.
For analysts, the prices that they set are not as accurate as the radio station and investors are risking bigger losses. If it was as accurate as the weather forecasts from this local radio station, I’d go ahead and buy a lot of stocks. It’d be easy money even if I had to wait longer in some cases.
I already admitted to using Target prices for buying American Airlines(AMR) in a previous post. I think target prices should be a way of gauging how positive or negative an analyst is on the company especially when comparing one analyst to another. The problem is that without a set time frame, it’s very hard to compare. Unless the analysts all stated a target price with a date, it’s impossible to compare. For example, Wal-Mart will be $58 on August 1, 2010. That opinion would be crystal clear. Then we could compare with another analyst that says Wal-Mart will be $60 on August 1, 2010. Based on my research February, here are the top 11 analysts that did not have a target price in their released opinions.
You can see how some analysts like Wells Fargo never have a target price, whereas other analysts like RBC Capital Markets have a high percentage of opinions that do include target prices. I’m going to do this for a few more months and then a year to give a fairer representation of which analysts like target prices and which ones do not. If I was an analyst, would I include a price target? Yes, if I stated a date, otherwise I wouldn’t because the information is not enough and it is misleading.
Here is a great blog arguing that analysts should set an “Error” price in addition to their Target price. The Error price should say how low the stock may go, since the Targer price represents how high the stock will go.
What would you do?