When preparing research reports on companies, Wall Street analysts work toward assigning price targets to shares—that is, where a stock is expected to be in a year—but a recent article in Barron’s argues that these targets may not always be useful to investors.
“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,” the article says, adding, “For investors, the assumptions that underlie analysts’ price targets are not always obvious.” To illustrate, the article provides detail regarding the differences in how analysts approach their valuation calculations, adding that they can “range from the very simple to the labyrinthine. And embedded in any methodology are assumptions that go unchecked unless an investor is willing to dig deep into a research report.”
The article cites comments from Tony Scherrer, director of research at Smead Capital Management, who contends that when analysts get “uniformly bullish” on a stock and boost their price targets and valuation multiples, “it is a signal for him to look elsewhere.” According to Scherrer:
- “If investors plan to hold a stock for years, then a price target reflecting the next few months isn’t all that relevant.”
- Price targets are a signal, “the proverbial tip of the iceberg, and there is a lot going on below the waterline.”
The article concludes that, while knowing something about target price information can make you a better investor, it’s important not to take the information at face value. Instead, it advises investors to “get back to evaluating business models and company management teams. That’s a target than can work for all investors.”