I swear I don't have a beef with broker analysts and their crystal ball, but I am amused sometimes from the reasons an analyst give to tweak their forecast numbers.
For example, an analyst's Target Price (TP) was adjusted up because of lower interest rate used in the discounted cash flow (DCF) valuation.
Technically, if you know DCF, that's not wrong. A lower discount rate means a higher net present value of future earnings.
Sadly, ceteris paribus (all other things being equal) exists only in an ideal world. In the real world, things don't correlate in a beautiful way. Most people suffer from a present focus bias. Try telling the provision shop owner he's richer now because SIBOR has gone lower. He'll think you're nuts, because he certainly feel no change. So why would a stock buyer be inclined to pay more for the same security?
Truth be told, a broker analyst is an extremely challenging job. Any form of forecasting is more of an art than a science. But even the weathermen have an easier time. They don't get slammed when it doesn't rain the next day as expected.
For a broker analyst, your head is on the chopping board when you stick your neck out for an imaginary number. When the customers want a price to buy the shares, it is tough to say, "I don't know", especially when your next paycheck depends on it.
That is why you don't see many broker analysts providing numbers too far away from the consensus. When you go for an extremely high or low forecast, you're either placed on a pedestal when it turns out right, or burnt at the stake when you get it dead wrong.
Another interesting reason given for raising TP is the rollover of fiscal year. When FY20 EPS estimate is 20 cents and FY21 is 22 cents, the Target Price automatically jumps higher as we cross over to the new year.
It's like growing a foot taller overnight as you celebrate your birthday.
Another example: the TP was raised due to the application of a higher P/E multiple.
I doubt any investor worth his salt will wake up, decide it's a bull market today, and pay more for the same dollar of earnings yesterday.
I sense the broker analysts rolling their eyes at me. Okay, in all fairness, I have absolutely no idea how to price a stock accurately. I mean, I know the valuation techniques, but there are so many factors to consider. It is mind-boggling, and my head hurt the last time I tried to work out the target price on MS Excel.
As retail investors, we probably shouldn't worry too much about the exact price to buy a stock. Because if a company is as good (fundamentally) as it gets, by virtue of profits and retained earnings, the market will eventually award the company a higher valuation. And hence a higher share price.
Of course, I say this with a caveat - The above doesn't apply during any bubble period. If you buy a stock at sky high valuation, be prepared to wait an awfully long time to get back to cost. (Or never.)
So my dear broker analysts, I feel your pain. It is hard to draw a bullseye around an invisible target.
And thank you for keeping me entertained as I read your reports throughout the circuit breaker period.
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| Image by Bruno /Germany from Pixabay |
For example, an analyst's Target Price (TP) was adjusted up because of lower interest rate used in the discounted cash flow (DCF) valuation.
Technically, if you know DCF, that's not wrong. A lower discount rate means a higher net present value of future earnings.
Sadly, ceteris paribus (all other things being equal) exists only in an ideal world. In the real world, things don't correlate in a beautiful way. Most people suffer from a present focus bias. Try telling the provision shop owner he's richer now because SIBOR has gone lower. He'll think you're nuts, because he certainly feel no change. So why would a stock buyer be inclined to pay more for the same security?
Truth be told, a broker analyst is an extremely challenging job. Any form of forecasting is more of an art than a science. But even the weathermen have an easier time. They don't get slammed when it doesn't rain the next day as expected.
For a broker analyst, your head is on the chopping board when you stick your neck out for an imaginary number. When the customers want a price to buy the shares, it is tough to say, "I don't know", especially when your next paycheck depends on it.
That is why you don't see many broker analysts providing numbers too far away from the consensus. When you go for an extremely high or low forecast, you're either placed on a pedestal when it turns out right, or burnt at the stake when you get it dead wrong.
Another interesting reason given for raising TP is the rollover of fiscal year. When FY20 EPS estimate is 20 cents and FY21 is 22 cents, the Target Price automatically jumps higher as we cross over to the new year.
It's like growing a foot taller overnight as you celebrate your birthday.
Another example: the TP was raised due to the application of a higher P/E multiple.
I doubt any investor worth his salt will wake up, decide it's a bull market today, and pay more for the same dollar of earnings yesterday.
I sense the broker analysts rolling their eyes at me. Okay, in all fairness, I have absolutely no idea how to price a stock accurately. I mean, I know the valuation techniques, but there are so many factors to consider. It is mind-boggling, and my head hurt the last time I tried to work out the target price on MS Excel.
As retail investors, we probably shouldn't worry too much about the exact price to buy a stock. Because if a company is as good (fundamentally) as it gets, by virtue of profits and retained earnings, the market will eventually award the company a higher valuation. And hence a higher share price.
Of course, I say this with a caveat - The above doesn't apply during any bubble period. If you buy a stock at sky high valuation, be prepared to wait an awfully long time to get back to cost. (Or never.)
So my dear broker analysts, I feel your pain. It is hard to draw a bullseye around an invisible target.
And thank you for keeping me entertained as I read your reports throughout the circuit breaker period.
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Yo bro...nice reading your articles.
ReplyDeleteHey thanks!
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