How Accurate Are Analyst Price Targets?

Analyst targets in theory can streamline a lot of trade decisions. Target price is higher than the current price? BUY! Oh, if only it was that easy.

A 2012 study of 11,000 analysts from 41 countries found target accuracy to be fairly low. 18% for 3-month and 12% for 12-month price targets.

There are a number of reasons for the low success-rate.

1) Targets are based on point-in-time information. Predictions get stale fast when information changes - this happens often.

2) Conflict of interest is a concern. Analyst who have a vested interest in a stock might be bias. If you owned Tesla, you might be swayed to give a generous target.

3) There's no standard for how price targets are achieved. Every analyst has their own models and methods. Results can vary wildly.

4) There's no accountability. Analyst can be completely off and simply revise their target. No sweat off their backs.

5) Markets are volatile, especially in the short-term. They can swing for no reason. Markets are made up of us unpredictable beings. No matter how much data you have, it's hard to know what we're thinking.

6) And most importantly, no one can predict the future.

It's understood amongst professionals that targets aren't truth. They're simply a signal. A way to sense how Wall Street is feeling about a stock. It's an interesting data point but not something you trust at face value. Next time you see an opportune price target, think twice before diving in.

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