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Do Stocks Ever Hit Analyst Target Prices?

Posted in Investing Expertise

In their March 2005 paper entitled “Do Sell-Side Analysts Exhibit Differential Target Price Forecasting Ability?”, Mark Bradshaw and Lawrence Brown test the accuracy of 12-month stock price targets both for individual analysts and for analysts overall. Using a filtered sample of about 100,000 individual 12-month stock price targets from Thomson Financial over the period 1997-2002, the authors conclude that:

  • Stock prices are at or above analyst targets at the end of 12-month prediction periods only 26% of the time. Stock prices reach analyst targets sometime during 12-month prediction periods only 35% of the time.
  • Stock price targets are more likely to be met when: (1) market returns over the 12-month forecast period are higher; (2) analysts have more experience; and, (3) analysts are employed by the largest brokerage houses.The higher the target relative to the current stock price, the less likely the stock price will reach the target. Surprisingly, volatile stocks are less likely to meet targets.
  • Analysts do not show persistent differences in abilities to forecast target prices. They do exhibit persistent differences in forecasting earnings and in picking stocks.
  • The market does react to stock price targets but seems to understand that hitting stock price targets involves more luck than skill.

In summary, analyst stock price targets are not good predictors of actual stock price potentials. Analysts exhibit this poor performance because they want to express optimism about the stocks they cover and have no compensation incentives or public accountability related to stock price targets.

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