Price Targets are Bullshit.
- Joshua M Brown
- February 10th, 2013
Do you remember my price target on Apple this past spring? I slapped a target of $2275 on the stock based on translating the A, A, P and L of the ticker symbol into digits from a phone keypad. I was half-kidding.
Are you buying and selling stocks based on the daily buy and sell calls from Wall Street's analysts? You should really stop doing that.
Sell-side analysts serve as marketing for brokerage firms' sales and trading operations. Also, they don't actually analyze stocks, they analyze companies. This is very helpful for the institutional consumers of this research but the upgrades and downgrades themselves are rarely actionable.
Analyst buy and sell calls are COMMERCIALS.
This is not the fault of the analyst. Analysts employed by Wall Street are extremely smart and hardworking, but they have an un-doable job, completely impossible.
The analyst must appear to be consistent with his calls and yet flexible. He must communicate with the firm's clients and with the management team at whichever company he is rating, sharing very little with each camp in a highly-regulated manner and remaining impartial, despite the fact that both sides pay his firm and, by extension, his salary. He must overcome the reality that his by-the-book analytical methodology means he will be slow to pick up turning points for stocks. He must also pretend that a third of his stocks' movements aren't dictated by the general markets and that another third aren't dictated by the direction of the sector they are in.
Also, classically-trained analysts are either clueless about or disrespectful toward technical analysis in the course of their ratings and commentary. Which means they are publishing about price only as it pertains to valuation, not as it pertains to the price of a stock itself. If this sounds retarded, it is. In the article I'm about to link to, you'll see that the only analyst to downgrade Apple in the high 600's was using some technical analysis and also has no brokerage operations to bias him. What a shock. This is why institutional trading desks are now fighting for that last penny per share in trading revenue when attempting to monetize this research - their buyside clients are no longer interested in these recommendations or price targets, except if there is some way to front-run them.
And all the while, as his estimates become more and more commoditized, the sell-side analyst must continue to play the futile quarterly earnings-per-share guessing game, in which the CEO of a company winks, the CFO nods and everyone just places their bets in and around the same roulette number anyway.
So what can you do, as an investor, now that you understand the nature of this game?
Use sell-side research for the background information it provides, for professionally conjured earnings and cashflow estimates and for a sense of what mainstream asset managers are hearing and thinking about a particular company.
But please don't pay attention to price targets, they are made up based on discounted cash flow analysis, which no one who trades a stock actually cares about - this is one of the biggest disconnects in all of finance.
And now for something completely similar, how many lifetimes can you spend watching this exact same thing play out over and over again...
From the New York Times:
Last September, Apple shares hit a record $705. And to the overwhelming majority of Wall Street analysts, that meant one thing: buy.
By November, with Apple stock in the midst of a precipitous decline, they were still bullish. Fifty of 57 analysts rated it a buy or strong buy; only two rated it a sell. Apple shares continued their plunge, and this week were trading at just over $450, down 36 percent from their peak.
How could professional analysts have gotten it so wrong?
Here's the answer to how - the firms make a lot of money when their institutional clients trade shares of Apple common and options based on the stock. They want that Apple business, especially when the stock becomes the number one Hedge Fund Hotel of all time, with over 200 of the largest funds loading up on the name last summer.
For revenue-starved equity trading desks, this moving and shaking of billions of dollars worth of Apple is a lucrative business. It also leads to spillover into other trades, other opportunities to work with a client. So how do they attract this trading activity to their desk in the deflationary hellscape that is the modern-day equities execution biz? Simple, they bull the stock up every week with ever-increasing price targets and outlandish reaffirmations. One of these motherfuckers at a small firm based in the Midwest came out with a target of $1111, I kid you not. Anything to draw attention to the firm for their piece of the pie.
Retail investors who follow these calls are just collateral damage - the firms themselves aren't in the business of catering to retail executions so they don't care if Mom & Pop buy or not based on these calls.
Anyway, read the rest of the story at the Times below and marvel at how little has changed post-Global Settlement.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.