Why not blindly trust the reports and course objectives that are published? And what psychological thoughts should one ask oneself when reading these? Comes with examples of how one should relate to course targets.
The psychological game that is a must when interpreting a new price target or stock coverage.
Buy, does it mean buy or how?
Purchases should generally be taken positively, but if the analyst has chosen to raise the price target slightly and at the same time raise the recommendation from accumulators to purchases, you just have to be a little extra careful. An analyst may feel pressured to raise the recommendation because other analysts have their recommendation of the stock to buy. Another reason is also possible, which must be understood so that you are aware of what is the main reason for the analyst’s upside of the stock. From here, you can find out for yourself how much you want to weight the analyst’s positive view.
Accumulate, it must be a little positive then?
As a starting point, Accumulate means that the shareholding should be supplemented with more of the share, and thereby be perceived as a positive thing, but unfortunately you can not be so sure that it is.
Notice what the price target and the recommendation sounded like in the past. If the recommendation has gone a step down the rankings, you should probably look with a little more critical eyes at the company than you might have just immediately imagined.
A step up the recommendation ranking should be seen as a positive element, but should continue to be taken with critical eyes, as it is probably due to the analyst seeing some positive future prospects for the company, which in 99% of the time is associated with risk, as one can not agree on what the future should look like.
The pressure on the price target
Analysts, like other people, may feel compelled to give in to the pressure and thereby adjust their price target and recommendation on the individual stock. The reason may well be that they will avoid being considered as someone who is about to fall off on it, or put another way, be wrong on it.
One of the important details of a price target is knowing the time horizon the analyst has set. Without a time horizon, a price target is downright useless. Often there is a time horizon of 12 months.
The tool of analysts
The vast majority, if not all, of the recommendations are based on so-called “DCF analyzes”, Discounted Cashflow, which discounts the company’s expected cash flows. These analyzes are sensitive to even the smallest changes in various estimates – especially in the part of the model called the “terminal value”, ie. all the cash flows that lie far into the future. Experience shows that the model is theoretically correct, but practically extremely dubious.
Course objectives and obsolescence
Many people blindly believe in the price targets given by covering a particular stock so blindly that they act on it.
Something strange is that the price target or large parts of the report that has been published are often outdated. There can be many reasons:
- The company may have experienced significant changes in the market or internally.
- The report is several weeks old and the large customers have already traded on it.