retiredcf wrote: Lots of opinions on the subject so here you go. GLTA
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Question:
How much faith, if any, do you put in analyst price targets? If a stock hits a price target, are investors supposed to sell?
The Answer: A: Price targets are really just informed guesses about a company's future value. Typically, an analyst will estimate a company's earnings and cash flow for the next year or two, and then apply a ratio - such as a price-to-earnings ratio - to those estimates to determine what the future stock price should theoretically be. Price targets are sometimes based on other valuation methodologies, such as discounted cash flow analysis, which estimates all of the company's future cash flows and determines what they would be worth today.
In a perfect world, the company's actual earnings would match the analyst's estimates and the stock would trade at the projected P/E, but in reality one or both of those numbers will be off the mark - sometimes by a wide margin - and the stock will either undershoot or overshoot the price target. If a stock does hit the target within the (usually 12-month) forecast period, it's not necessarily a signal to sell, however. That's because, as a stock moves higher, analysts often raise their price targets. Similarly, if the price falls, analysts often lower their targets.
Some investors take a cynical view of price targets, seeing them as a technique the brokerage industry uses to increase demand for a stock. Whether intentionally or not, analysts tend to be overly optimistic with their targets.
"Target price forecasts are overly optimistic on average, and "¦ analysts demonstrate no abilities to persistently forecast target prices," the researchers concluded, although they said analysts did show skill in forecasting earnings.
The results are perhaps not surprising. Even if an analyst understands a company well enough to project its earnings accurately, he or she has no control over the many factors that affect stock prices, such as interest rates, the economy, geopolitical events and investors sentiment.
Bottom line: don't make investing decisions based on price targets alone, but don't ignore them, either.