In last week's edition of Barron's, ("Do Wall Street Stock Price Targets Really Matter? What Investors Need to Know"), financial journalist Al Root writes about the history of price targets set by sell-side research analysts, and how these targets may or may not be useful to investors. We think the article is worth a read, and can be found here.
We agree that sell-side price targets are generally of little use to the buy-side (investors). His comment about "Cisco’s price target is always 10% to 20% above where the stock is trading" is spot-on... rarely will analysts venture outside of this comfortable range. We'd add, though, that price targets that are below, or more than 25% above, the current price are worth looking at more closely, as the analyst is likely expressing a strong, non-consensus opinion.
Like many investors, here at The Turnaround Letter, we take a buy-side approach to using price targets. We combine our fundamental outlook for the business, an appropriate and specific time horizon and our clearly illustrated valuation methodology to derive our end-of-turnaround price targets. The inputs to our targets help us, and our subscribers, better understand and measure the company's progress with its turnaround.
As author Root accurately stated at the end of his article, "that's a target that can work for all investors".
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