Are Wall Street 'target prices' truly reliable?

Understanding how target prices are formed and how valuations are derived can make you a better investor. The key is not to treat extreme target prices as the stock’s intrinsic value, nor to place excessive faith in a single number. When investors consider buying a stock, the ultimate question always boils down to: What is it worth? This is the very question every Wall Street analyst attempts to answer when preparing a research report on a company. Analysts often respond by assigning a target price—typically representing where they expect the stock to trade over the next 12 months. These target prices appear in TV reports, Barron’s articles, and elsewhere. Sometimes the target itself becomes news: In 1998, Henry Blodget predicted that e-commerce upstart Amazon (AMZN) would reach $400—a forecast made when the stock was trading around $240. Just three weeks later, Amazon hit Blodget’s $400 target. More recently, J.P. Morgan (JPM) analyst Stephen Tusa set a $10 target price for General Electric (GE), which proved prescient (Editor’s note: GE has fallen 20.2% over the past year and closed at $10.07 on July 18). Yet for stock forecasting, target prices aren’t always useful. Many professional portfolio managers express skepticism, viewing them largely as marketing tools employed by brokerages to generate investor interest in particular stocks. Indeed, Barron’s found that among S&P 500 constituents, 28 stocks rated ‘buy’ (or equivalent) carried target prices *below* their current market levels—including Deere (DE), Walmart (WMT), Costco (COST), and Abbott Laboratories (ABT). For investors, the assumptions underpinning analysts’ price targets aren’t always transparent. Take Cisco Systems (CSCO), a Wall Street favorite. We interviewed two analysts covering the company. Both issued ‘buy’ recommendations and similar price targets—but offered markedly different rationales for their valuations. (Barron’s agreed not to disclose the analysts’ identities.) The first analyst applied a 17x P/E ratio to his forecast of Cisco’s fiscal-year 2020 earnings per share—a multiple 30% above the company’s historical average. He argued that Cisco’s business model justifies the elevated P/E, but offered no further explanation.

The 12 Most Overvalued U.S. Stocks

Some individual stocks surged dramatically in 2020: Tesla soared 665%, and solar company SunPower rose roughly 500% (Editor’s note: data as of December 22 last year). Such sharp rallies naturally raise the question: How high is too high? Determining whether a stock is overvalued isn’t easy—especially for names like Tesla and SunPower, whose gains have reached triple-digit percentages. Investors often rely on Wall Street analysts’ target prices—but sometimes those targets sit far below current trading levels. Still, comparing current stock prices with what Wall Street analysts deem fair value reveals the following 12 stocks as the most overvalued in the U.S. equity market: SunPower, Editas Medicine (EDIT), Redfin (RDFN), Tesla, Stitch Fix (SFIX), Ultragenyx Pharmaceutical (RARE), U.S. Steel (X), Denali Therapeutics (DNLI), Intellia Therapeutics (NTLA), Cree (CREE), Enphase Energy (ENPH), and Livent (LTHM). Most of these 12 stocks are growth-oriented, spanning healthcare, software, and electric vehicles. U.S. Steel stands out as one of the few traditional cyclical stocks on the list. After two difficult years of operations, its share price is rebounding—but remains well below its 2018 peak of $48. Analysts’ target prices for these 12 stocks average 34% *below* their current market prices—whereas for S&P 500 constituents overall, target prices average 7% *above* current levels. Before investors rush to sell these names, several considerations warrant attention. These 12 significantly overvalued stocks command high valuations precisely because they’ve performed exceptionally well: Their average return in 2020 approached 320%; over the past three months, it neared 185%. Although Wall Street analysts have repeatedly raised their targets, they’ve struggled to keep pace with these stocks’ surges—their average target price has climbed nearly 140%.

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H.C. Wainwright reiterated a Buy rating for Gevo Inc and maintained its target price at $14, signaling continued confidence in the renewable chemicals company's stock performance.

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