Exploiting Analyst Stock Price Targets

Can investors exploit analyst stock price targets by finding the best analysts and overweighting the most extreme target-implied returns? In their March 2025 paper entitled “Alpha in Analysts”, Álvaro Cartea and Qi Jin test the informativeness and exploitability of sell-side analyst stock price targets. To test informativeness of target prices, they each month for each analyst:

• Use price targets to deduce 12-month return forecasts.
• Form a hedge portfolio that is long (short) stocks with positive (negative) return forecasts, with weights proportional to magnitudes of forecasted returns and absolute value of the sum of weights equal to one.
• Compare analyst portfolio performance to that of an equal-weighted, long-only portfolio of the same stocks.

To test exploitability of results, they each month:

• Predict portfolio profitability for each analyst via an inception-to-date regression of six analyst performance metrics up to 12 months ago (capturing historical performance and breadth of stock coverage) versus next-month portfolio return.
• Construct a portfolio of analyst portfolios with higher (lower) allocations to those with higher (lower) predicted returns.

Using daily analyst price targets and associated stock returns/firm characteristics as available for common NYSE/AMEX/NASDAQ stocks during January 1999 through November 2024, they find that: (more…)