Missing the Boat!
On April 12, 2010, JP Morgan upgraded CHRW – C.H. Robinson from Neutral to Overweight. The target price was revised from $24 to $32 but the strange thing was that the previous day’s closing price for CHRW (4/11/2010) was already more than the target price, at $56.45. That’s more than 43% above target price. Now how are investors supposed to interpret this? When JP Morgan says Overweight, it means: “Expects stock to outperform average total return of stocks in analyst’s or analyst’s team’s coverage universe over next 6-12 months.” This is a pretty strong signal to buy and their highest recommendation. However, they’re targeting the stock price at $32, so why would I buy if they are predicting it to drop 43%. This doesn’t make a whole lot of sense. I thought there was something wrong with my data but I double checked it and it was correct. Surely a global company like C.H. Robinson with more than $7 billion market cap and more than 7,000 employees deserves better analyst coverage from JP Morgan. Fortunately, opinions from other analysts were more reasonable and the stock price was not really affected that day and today closed at $57.74.
Analysts often upgrade stocks and revise their target prices but I’ve noticed on many occasions this information is too late because the price is already too close to the target for anyone to make significant gains. Investors don’t want old news because more than likely, we’ve missed the boat! In this specific case for JP Morgan, they are so late and so off that the current price is above the target price. After reviewing my data of stocks that were upgraded and had target prices set or raised, I found 866 opinions since 2/24/2010. Out of these, 91 opinions had a target price of 5% or less than previous day’s closing price. That’s 10.5% of the total. What does that tell us? 1 in 10 analysts are updating their opinions when the action is already over. There is little to no benefit for investors because of the timing of this information. I hope they’re not holding back this information for internal use first before releasing it to the public. The worst performer was Credit Suisse where 14 out of 62 opinions were made when the price was 5% or less than the target price, that’s a whopping 22.6%. Close to 1 out 4 recommendations were worthless. Ok this is as negative as this post is going to get. Here comes the better news. Which analysts are providing us stocks that have more potential? I filtered out any analyst that had less than 10 upgrades/target price raises since 2/24/2010. Then I did an average calculation on all their estimates and filtered out any analyst that had an average target price of less than 25% from the current price of the stock and here is my list of analysts and their average:
I’m not saying that these analysts are correct but I am saying that their information is more valuable when it comes to timing. Some of these target prices could be very long term and some can just be totally wrong but my point is that there is no point in upgrading a stock to BUY, and setting the target price at the same price or very near to the price that it closed at on the previous day. The run up to the price is already over.
I can also see that these numbers might skewed a bit just because the amount of data is less than I would have liked but I do think that there is enough beneficial info and these numbers that I’ve crunched can set some expectations.