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Stock Price Targets Are Specious

Analysts are now required to have price targets on research reports, with attendant justification, which can involve a formal model to calculate fair or intrinsic value. But this also means predicting the future, encompassing influences like overall stock market trends, the economy, war, and interest rates, which are far beyond the analysts’ presumably good insight into company and industry prospects. In the bubble years, the Internet analysts pulled absurd, astronomical triple-digit price objectives out of the blue, and naive investors actually gave these goals credence. It still happens, as in the case of the excessive expectations for the Google stock price. In current, more rational times, the guesses may be a bit more tempered but are still unrealistic, or at least unbalanced. Stock price estimates are utilized to emphasize Buy or Sell ratings. Analysts put too high a goal on stocks where they have favorable opinions to help justify their view, and to assist in marketing to hype the story. The price point forecast is artificially low for companies on which analysts are negative. Another issue here is that when such a target is hit, it can trigger a downgrade in analyst opinion. That impacts the stock price and is an adverse short-term influence on long-term investors. Opinion changes based on the stock achieving a published price target should be taken lightly. You can see what I think of price objectives—terrific if you like fiction.

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