Saturday, January 30, 2016

Analyst Price Targets Gone Wrong

So I was recently browsing a report by FactSet which aggregates analyst price target data for stocks. So for fun, I went back to last year's report to see what was said and how things turned out.....Results? Ugly.

First, I looked at their interesting chart which shows the top 10 stocks in the S&P 500 whose price at the start of 2015 was most significantly below its aggregate analyst price target.

The average of these 10 stocks were 45.7% below their price targets. Wow, sounds awesome, why not just make a portfolio of these 10 stocks and roll with it...+47.5% returns here we come! Well, here is how that would have turned out.

No, I did not reverse the signs....they actually were THAT bad! They had the average % return correct.....JUST IN THE WRONG DIRECTION!! Remember folks....the S&P 500 returned +1.4% in 2015, if you equal weighted all 500 stocks it still would have been only -2.2%. It's quite a feat to do this badly.

How about the stocks whose aggregate price targets were most BELOW their starting price in 2015? The stocks they thought would do worst?

Here, on average, they expected these stocks to decline -12.1%. And the results?
Well atleast the average fall was close but what I hope your noticing is how much BETTER these did then those expected to perform best. Not only that but this group actually included 4 stocks that were positive and 6 stocks that performed better than the equal weighted S&P 500.

Lastly, how about just a bottom up look at expected sector returns? What were they saying in 2015?
Ok, so they were expecting 6.8% for the S&P and it returned 1.4% but what about if you want to use this to overweight some sectors? How about if you just equal weight the top 5 sectors (Energy, Materials, Industrials, Telecom & Health Care)? That would give you an expected return of 10.0%. Results?

Terrible, enough said.


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