Beware of optimistic price targets
If you pay attention to price targets set by big brokerage firms, maybe you shouldn’t. It was just one year ago that the average price target for Apple’s stock was $724 for June 1 of 2013. That number is the average of 12-month targets released last Spring by the nation’s largest brokerages and investment banks. Goldman Sachs was among the most bullish, with a target of $850. Nine analysts said the stock would be above $800 per share. As of 5/7/13, Apple was trading at $465 per share after reaching its $700 or so peak last fall.
Only a few analysts covering the stock said a year ago that Apple was overpriced and would decline substantially. (Source: Apple 2.0 and AAPLInvestors.net). What’s the lesson here? Research analysts put too much emphasis on momentum and too little on fundamental analysis. They did not see Apple’s financial challenges as a serious threat to the stock price until large institutions started dumping the stock. Keep that in mind when you consider the predictive power of price targets. And by all means, don’t think that the close clustering of targets from many big name banks makes them any more useful.
The lesson here is to always look at a company’s fundamentals, including revenue and profit results and projections. Better yet, read their reports to shareholders. Don’t assume that the analysts setting price targets have done this work for you.