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Scoop Market Mysteries 10-17
🔎 Market Mysteries: What are these analyst ratings & price targets all about?
Market Mysteries of the week
What are analyst ratings and price targets, and should I care?
Answer:
Wall Street analysts get paid to give their opinions
on whether they think a company's stock price will rise or fall. Their insights can be a helpful resource, but don't expect analysts to predict the future.
Who are these analysts?
They are typically
paid professionals at financial firms whose job is analyzing public companies.
These analysts will study corporate financial reports and listen to corporate earnings calls, then use the information they gather to form an opinion on what they think a company is worth. Each analyst typically dedicates their time to a particular set of companies, usually within a specific industry. This way,
they develop an expertise in understanding the particularly relevant dynamics of success for each company
.
How do the ratings work?
Within their regular reports,
research analysts typically provide a price target and a rating
. They have analyzed this particular company and decided that based on its profits, revenues, cash flows, assets, growth rates, whatever - the company is worth $X billion. Therefore its stock price should be $X per share.
It's highly subjective
, with many qualitative and quantitative assumptions baked into the valuations.
The price targets are usually short-term projections.
They might say they expect company X's stock price to be $120 at year-end. We all know how volatile the stock market is in the short term, so you can't take the numbers too seriously.
What's more important about the price target is its
relevance to the current price of the stock.
If they're saying they expect it to be $120 at year-end, but it's only $60 today, they're making a big statement. The analyst would be saying that the market is significantly undervaluing this particular company.
To add more characterization to their reports,
analysts will give the company a rating
. There's a mix of standard terminology, typically consisting of a range of recommendations to
"sell," "hold," or "buy."
"Underweight" and "underperform" are on the negative side, while "overweight" and "outperform" are positive, and "neutral" is right there with "hold."
Should I be listening to them?
These people are experts
, so their insights are valuable. But as we've said before, investing is a bet on the future.
No one can predict the future
any better than another.
Even at the highest level of expertise,
there's rarely a consensus
. For example, out of 37 research analysts covering
. That means in a group of some of the most experienced stock analysts in the world, who have dedicated their careers to studying Tesla and companies like it, the predictions for what the stock might do over the next year range from nearly doubling in value to a crumbling loss of -90%. Tesla's a pretty polarizing company, but even looking at something like
.
Analysts' reports either inform the firm's investment decisions or get sold like any other content. Just like any other content creator,
analysts want their words to be heard and valued, often purchased
. Strong opinions sell.
Financial content is still content. There are a lot of intelligent people putting out content, but
no one has the answers
.
Listen in moderation,
and don't be afraid to trust yourself or keep it simple.
Feel free to share this with anyone who might find it helpful.
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