6

I was surprised to see this announcement from Zach's Investment Research re: AAPL stock: "We maintain our Neutral rating on the stock and raise our price target to $354.” But AAPL is today trading only $10 lower than that at $344. Is Zach's expressing the opinion that they believe AAPL will only increase $10 (from $344 to $354) over next 12 months?

I understand that analysts:

  • Revise their estimates continually throughout the year
  • Probably have an incentive to forecast conservatively

I guess my question is: without explicit qualification to the contrary, are "price targets":

  1. 12-month forecasts
  2. no implication of time horizon implied whatsoever
  3. something else?

I'm just boggled if it's (2) because it means that firm's price targets are effectively useless for comparing one of their forecasts against another.

I'm hoping it's (1) because otherwise all these market forecasts are just dressed-up versions of stock fanbois sitting at a bar going, "Man, GOOG is totally going to $1000 one day!" That's inane w/o some rough time horizon so I can imply a CAGR.

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  • If an analyst gives public info, typically the Motley Fool tracks their performance. For example, here is Jim Cramer's performance. – Alex B Jan 27 '11 at 16:08
6

I wouldn't put too much stock in the guidance generically... it's more a measure of confidence in the company. When you listen to the earnings calls and start following a particular analyst, you'll understand where they come from when they kick out a number.

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  • Definitely a useful nuance you've teased out - that it's far more useful to gauge the change in one analyst's change in temperament over time. Not nearly as useful for comparing two analysts temperament at one point in time. – Jon S Jan 26 '11 at 23:40
  • You got it. There are more subtle things too. Think your local newspaper.. once you get the slant of a reporter or columnist, the real "news" in the newspaper is often what the journalist doesn't write... especially in local politics. Following a stock to that level of detail probably isn't productive unless you are a pro or have alot of money on the table! – duffbeer703 Jan 27 '11 at 3:32
  • Productive in my case, since I'm (happily) long enough in AAPL that Steve Jobs' recent medical leave announcement probably means I'll have to retire a year later. ;-) – Jon S Jan 27 '11 at 15:36
  • This pun has lived on for years without a single groan? – moodboom Mar 2 '17 at 4:16
5

If the time horizon is not indicated, this is just a "fair price". The price of the stock, which corresponds with the fair value of the whole company. The value, which the whole business is worth, taking into consideration its net income, current bonds yield, level of risk of the business, perspective of the business etc..

The analyst thinks the price will sooner or later hit the target level (if the price is high, investors will exit stocks, if the price is cheap, investors will jump in), but no one knows, how much time will it take.

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  • Any "fair price" assessment has the implicit assumption that your money will grow at a rate which compensates you for the risk involved with that investment. For most stocks, that means at least a 4% real (inflation-adjusted) return should be expected if you invest at the target price. (Otherwise it'd be overpriced: you could invest in the market at large and do better.) – user296 Jan 27 '11 at 20:56
  • This compensation differs strongly, depending on the nature of the business. For example, Coca-Cola business is considered to be much less risky, than small hi-tech company. – Nick Feb 1 '11 at 22:18
2

The time horizon applicable to the price target is always specified by the broker or bank which published the research report.

You will find this information in the disclaimer, which is present on every research report. Usually it is 12 months, but some firms give 6 months price targets.

However, you should never rely on the price target alone and always combine it with the following details (to name a few): Are the analyst's estimate above or below consensus estimates (or company guidance), did the analyst rise or lower its estimates. What is the rating on the stock (Buy, Sell, Hold...), when did he change his rating or price target.

Does the firm do business with the company? (which may influence a bullish tone and optimistic price target).

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  • hadn't thought to check the disclaimers, thx! Though admittedly I'm usually seeing press quotes of the report, rather the report itself. – Jon S Mar 26 '12 at 18:11
1

I don't think you can always assume a 12-month time horizon. Sometimes, the analyst's comments might provide some color on what kind of a time horizon they're thinking of, but it might be quite vague.

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  • I don't mind the case where they qualify it to some level, e.g. any of the following are a lot better than nothing: a) "through next earnings", b) "until they release Product X", or c) "next 4-5 quarters". But devoid of any such qualifiers, their forecasts are completely non-falsifiable, which is what bugs me: it's hard for me to judge the reputation of someone who can't be proven wrong. But moreover, the price target is just completely meaningless unless there's at least an implied timeline as all companies' stocks eventually go to $1000 if they don't go bankrupt! – Jon S Jan 26 '11 at 19:47
  • I assume they mean that the price would be a fair price for the company as it's operating right now (given earnings, cash flow, growth, ability to execute) and that anything less is a bit of a bargain that the market is overlooking. Of course, the market may remain irrational longer than you remain solvent, but... – user296 Jan 26 '11 at 20:40
1

Most commonly, unless you read 'fair value target price,' an analyst's target price is a 12-month target price. Typically, there is a firm wide policy determining which time horizon to use.

No analyst would provide an open ended target price, it doesn't make any sense (you discount cash flows to a certain period, adjust for inflation, etc). So there is always a time horizon.

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-1

Analysts normally (oxymoron here) gauge their targets on where the stock is currently and more importantly where it has been. Except for in the case of say a Dryships where it was a hundred dollar stock and is now in the single digits, it is safe to assume that Apple for instance was well over $ 700 and is now at $500, and that a price guidance of $ 580 is not that remarkable and a not so difficult level to strike. Kind of like a meteorologist; fifty percent chance of rain. Analysts and weathermen.Hard to lose your job when your never really wrong.

Mr Zip, Over and outta here

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