Fool's Eye View

[ June 14, 2000 ]

Price targets? Pah!

By Stuart Watson (TMFTiger)

Great Titchfield Street, London -- There is a lot of drivel written about the stock market. I'm sure I am as guilty as anyone. But there is one particular area of stock market commentary that is always complete rubbish as far as I am concerned, and that is share price targets set by brokers.

You see these announcements referred to a lot in market reports in the papers. Unfortunately they also seem to populate our discussion boards. For the benefit of the uninitiated, the process behind these recommendations is fairly simple. A broker will simply take a wild guess at what he thinks the share price of a particular company will be in three or six months time. This is simply geared to encouraging his clients to buy the shares and generate commission for their firm. It is very rare that you see a price target that it is actually below the current price.

For some reason these price targets seem to have credibility in the media and among certain investors, even though we all know that it is impossible to make short-term predictions about the stock market. Unfortunately that means they can be self-fulfilling. Normally the prediction will be based on some spurious comparison with a similar company. They will argue that Company A deserves to be priced at a similar price to earnings (P/E) ratio to Company B. Hence they calculate a price target for the shares. For some reason it is always the more lowly rated company of the two that deserves to be rated higher, and not vice versa. I can never quite understand how you can argue that the price of one company is wrong on the basis that the price of another is different. How do you know which is wrong? In fact, they could both be wrong.

The setting of price targets is also based on a strategy of regular switching between stocks in order to get a gain of say 20% or 25% in a few months and then moving onto the next. That would be fine if you could predict short-term movements but in reality this practice is more likely to line the pockets of your broker.

It would be interesting to see how many of these price targets are actually acheived within the timeframe laid out. I suspect the percentage is actually quite low. I don't think you should include instances where the price does reach the target and then falls back again. These are scant consolidation for long-term investors, which the vast majority of private investors still appear to be.

Now if a broker was prepared to put their neck on the line and predict a reasonable price for five and ten years down the line, that would be worthy of more attention. Until that time price targets should be treated with the utter contempt that they deserve.