Meet The Most Optimistic People On The Planet

With all the negativity in the world today, there is one distinct group of people who always see the glass as half full: equity analysts. I’ve written about equity analysts several times before and warned against the dangers of relying on their price targets when making investment decisions, but with the recent volatility (mostly downwards) in stock prices, I feel it’s worth a more up-to-date analysis to see just how optimistic they are that things will turn out rosy in the near term.

My Methodology

As you may know already, equity analysts make price targets usually for one-year periods at a time - sometimes 18 months, but in general they are attempting to forecast the stock’s price one year into the future. Consensus price targets can then be calculated, with my source (Marketbeat) calculating it as each brokerages most up to date price target, as long as that price target was made within the last year.

Now, it isn’t really fair to hold equity analysts to price targets they made before COVID-19 happened. Even as the virus started spreading to the Western countries, you can’t fault them for underestimating the gravity of the impact on the economy. When judging price targets, it’s only fair to give them a pass on this. So instead I will be limiting my analysis to price targets made within the last 5 calendar days (i.e. this week only) - and there have been a lot of them as firms rush to make their adjustments. By using price targets made within the last 5 days, these equity analysts would know the impact this is having on the economy, or at least they should know.

The Results

Of the 226 S&P/TSX Composite Index stocks I’ve analyzed, there have been 171 price target updates on 110 stocks. Of these price targets, the average implied upside (using the closing price as of March 26, 2020), is a whopping 34.55%. Stretch this to 30 days and the implied upside grows to 46.20%. Is anyone really expecting this sort of return if we were to buy today?

I also want to note that of these 110 stocks, only 17 have a consensus price target less than yesterday’s close price. So as far as equity analysts are concerned, 85% of companies will be trading at higher prices than they were yesterday. That’s quite a batting average.

Suncor Energy, for example, had six price target updates since Monday alone - one at $24, three at $27, and two at $34. They closed yesterday at $17.97, meaning that even the most pessimistic price target still calls for a 33.56% one-year upside. JPMorgan Chase is the firm with this $24 price target from March 23, and this was a reduction from a $33 price target made just 12 days earlier on March 11. Perhaps not so coincidentally, the share price decline was pretty much around the same as the price target decline during this time frame.

What is going on here? Are analysts merely maintaining specific price target premiums or are they taking a robust look at company and industry operations and letting that guide their forecasts? I don’t know the answer unfortunately, but maybe some of my readers will?

Conclusion

I can come to no other conclusion that baked into the complex company-specific models equity analysts use is an extreme optimism bias. Many brokers appear to be price tracking as well, simply dropping their price target by about the same amount the share price has declined over that same period. There’s also probably an element of group-think too, similar to mutual fund closet index managers, where analysts are fearful for drifting too far away from other analyst’s opinions and are content to just blend in.

Based on current forecasts, one company expected to do well is Norbord, with Raymond James offering up a Strong-Buy rating with a price target of $44, and Scotiabank lowering their price target to $30. As of yesterday’s closing share price of $18.86, both of these targets represents massive upside. The only question is, can you trust them?

Let me know what you think!