Price Targets are Bullshit.
- Joshua M Brown
- February 10th, 2013
Do you remember
my price target on Apple this past spring? I slapped a target of $2275 on the stock based on
translating the A, A, P and L of the ticker symbol into digits from a phone
keypad. I was half-kidding.
Are you buying
and selling stocks based on the daily buy and sell calls from Wall Street's
analysts? You should really stop doing that.
Sell-side
analysts serve as marketing for brokerage firms' sales and trading operations. Also, they don't actually analyze stocks, they analyze companies. This is very helpful for the institutional
consumers of this research but the upgrades and downgrades themselves are
rarely actionable.
Analyst buy and
sell calls are COMMERCIALS.
This is not the
fault of the analyst. Analysts employed by Wall Street are extremely smart and
hardworking, but they have an un-doable job, completely impossible.
The analyst
must appear to be consistent with his calls and yet flexible. He must
communicate with the firm's clients and with the management team at whichever
company he is rating, sharing very little with each camp in a highly-regulated
manner and remaining impartial, despite the fact that both sides pay his firm
and, by extension, his salary. He must overcome the reality that his
by-the-book analytical methodology means he will be slow to pick up turning
points for stocks. He must also pretend that a third of his stocks' movements
aren't dictated by the general markets and that another third aren't dictated
by the direction of the sector they are in.
Also,
classically-trained analysts are either clueless about or disrespectful toward
technical analysis in the course of their ratings and commentary. Which means
they are publishing about price only as it pertains to valuation, not as it
pertains to the price of a stock itself. If this sounds retarded, it is. In
the article I'm about to link to, you'll see
that the only analyst to downgrade Apple in the high 600's was using some
technical analysis and also has no brokerage operations to bias him. What a
shock. This is why institutional trading desks are now fighting for that last
penny per share in trading revenue when attempting to monetize this research -
their buyside clients are no longer interested in these recommendations or price
targets, except if there is some way to front-run them.
And all the
while, as his estimates become more and more commoditized, the sell-side
analyst must continue to play the futile quarterly earnings-per-share guessing
game, in which the CEO of a company winks, the CFO nods and everyone just
places their bets in and around the same roulette number anyway.
So what can you
do, as an investor, now that you understand the nature of this game?
Use sell-side
research for the background information it provides, for professionally
conjured earnings and cashflow estimates and for a sense of what mainstream
asset managers are hearing and thinking about a particular company.
But please
don't pay attention to price targets, they are made up based on discounted cash
flow analysis, which no one who trades a stock actually cares about - this is
one of the biggest disconnects in all of finance.
And now for
something completely similar, how many lifetimes can you spend watching this
exact same thing play out over and over again...
From the New
York Times:
Last
September, Apple shares hit a record $705. And to the overwhelming majority of
Wall Street analysts, that meant one thing: buy.
By
November, with Apple stock in the midst of a precipitous decline, they were
still bullish. Fifty of 57 analysts rated it a buy or strong buy; only two
rated it a sell. Apple shares continued their plunge, and this week were
trading at just over $450, down 36 percent from their peak.
How
could professional analysts have gotten it so wrong?
Here's the
answer to how - the firms make a lot of money when their institutional
clients trade shares of Apple common and options based on the stock. They want
that Apple business, especially when the stock becomes the number one Hedge Fund Hotel of all time, with over 200 of
the largest funds loading up on the name last summer.
For
revenue-starved equity trading desks, this moving and shaking of billions of
dollars worth of Apple is a lucrative business. It also leads to spillover into
other trades, other opportunities to work with a client. So how do they attract
this trading activity to their desk in the deflationary hellscape that is the
modern-day equities execution biz? Simple, they bull the stock up every
week with ever-increasing price targets and outlandish reaffirmations. One of
these motherfuckers at a small firm based in the Midwest came out with a target of $1111, I kid you not. Anything to draw
attention to the firm for their piece of the pie.
Retail
investors who follow these calls are just collateral damage - the firms
themselves aren't in the business of catering to retail executions so they
don't care if Mom & Pop buy or not based on these calls.
Anyway, read
the rest of the story at the Times below and marvel at how little has changed
post-Global Settlement.
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