Wall Street analysts can’t resist setting price targets for the stocks they follow, even though the practice seems to have limited value for predicting where a stock is headed.
Setting outlandish price targets for “bubble” stocks became one of the more memorable--or forgettable--features of the Internet boom of the late 1990s. But some market watchers say analysts are still overly optimistic when it comes to price targets, which often are given for six to 12 months down the road.
To cite but one example: Lehman Bros. analyst Holly Becker recently cut her price target for media giant Yahoo Inc. to $13, just six months after she placed a 12-month target of $20 on its shares. In April, Becker declared, “It’s time to jump in!” This month, she said she was “hard-pressed to find a [near-term] catalyst” for the shares.
Price targets are “purely marketing” on the part of analysts, said Marshall Front of money management firm Front Barnett Associates.
“Analysts are part of brokerage firms, and their motivation is to cause their investors to move money from one stock to another,” he said. "[Price targets help] the sales force of the brokerage firms convince customers that a stock should be sold, or another bought.”
That, in turn, generates trading commissions.
Becker’s retreat on Yahoo shares seems especially telling because she has a reputation for having avoided much of the ungrounded optimism that was prevalent among Web analysts during the 1999-2000 boom.
For a month or so, Becker’s April prediction on Yahoo shares proved astute. They rose $2.81 on the day she made her call and peaked at $22.92 on May 2. But then, as the economy worsened, Yahoo shares began a slow side. They closed Friday at $12.08, about their price when she issued her report.
“Price targets are never a very good thing to focus on,” said Mitch Zacks of Zacks Investment Research in Chicago. “They’re not reliable sources of information. The only thing to take to the bank are earnings estimates and changes in earnings estimates.”
Becker is “very good at predicting what Yahoo will earn this quarter, how Sept. 11 affects Yahoo,” Zacks said. “But neither she nor any other analyst has the ability to tell you what stocks should be valued at.”
Analysts’ price targets “are not based on facts but generally qualitative assessments,” and there “is very little value in tracking price targets over time,” he said.
Other Wall Street analysts this year have had as little or even less success than Becker in setting some of their targets--especially as the stock market continued a drop that has seen the Standard & Poor’s 500 index fall 17% year to date, as the economy has slowed.
In late January, Christopher Vroom, then an analyst for Credit Suisse First Boston, urged investors to consider buying shares of business-to-business software maker Ariba Inc., which then were selling for $38.25 each.
“Now is exactly the time that investors should be considering [Ariba] common shares given the clear leverage that is emerging in the model,” he wrote in a Jan. 22 note to clients. Ariba shares, however, continued to slide throughout the year; they closed Friday at $2.42.
In February, Merrill Lynch analyst Judah Kraushaar issued a report on Citigroup Inc. titled “A Growth Stock Whose Time Has Come” that gave a 12-month target of $80 for the shares. The stock of the No. 1 U.S. financial services firm, which traded at $55.46 when the report came out, closed at $45.06 on Friday.
The same month, Bear Stearns analyst Victor Miller reiterated a $75 target for shares of Clear Channel Communications Inc., a top U.S. radio broadcaster. The shares, trading at $58.02 when he issued the report, have fallen to $43.70.
Becker, Kraushaar and Miller did not return calls seeking comment.
Some price targets prove helpful. Lehman analyst Joel Tiss in January cut his rating for Ball Corp., a maker of food and beverage containers, yet retained his price target of $50. The shares, which were trading at $43.13, fell for a few weeks after his comments but then began an upward march that has taken them to $56.41.
Price targets help “you quantify an important notion. . . . At what number or stock price does a stock become fairly valued, or at what number or stock price does a stock begin to become overvalued?” said Hugh Johnson, chief investment officer at First Albany Corp.
Even so, making an investment based on a price target seems just as often to produce a bad as a good decision, Johnson said.
An analyst’s occasional prescience is unlikely to make believers of experienced money managers.
“Retail investors jump to price targets and the analyst’s recommendation,” Zacks said. “Those are the parts institutional investors discount the most. They never say, ‘Hey, look at the price target, that’s a screaming buy.’ ”