There are a lot of publicly available facts out there for beginner investors, and a host of data points provided by big-time investment banks that you can use in your research.
As long as we are piggybacking on the hard work of those Wall Street insiders, why not cut right to the chase and find out exactly what stocks they like and which ones they dislike?
Frankly, these folks are really not all that much smarter than you and me, as I said at the onset of this book. So remember that these opinions are just validation of your thesis — not the final word on where a stock will go.
But it’s worth noting what these Wall Streeters think all the same, just as an added level of fact-checking.
It’s also worth noting that the experts themselves often disagree. But this too can be a plus. By taking even the most pessimistic of Wall Street opinions, you bake in a level of safety to your analysis.
Let me show you what I mean.
What’s the Mean and Median Price Target?
Let’s turn again to a company quote page in Yahoo! Finance, and this time the “Analyst Opinion” portion. You’ll find the mean target and the median target here.
If you can’t remember your high school math, the mean is the average and the median is the figure in the middle of the estimates.
For instance, let’s say a stock has five analysts who set price targets of $40, $45, $50, $55 and $75. The mean, or average, is $53 (add up the sums to get $265, then divide by 5), but the median is $50.
Generally speaking, the purpose of picking the median target is to exclude an outlier. Sometimes, the difference is negligible. Take McDonald’s, where the mean ($107.77) and median ($108) are right on top of each other. That’s because there are 22 analysts, and all targets fall between a low estimate of $95 and the high of $115 — a mere $20 range for the lot of them.
Take a very different restaurant stock like Chipotle (NYSE:CMG), however, which is a smaller company in growth mode, and you’ll see a much different range — from as low as $260 to as high as $450 a share! The mean, or average, is $383.50 for Chipotle — but as you can see, the outlier on the downside is dragging that average down. The median target is actually $400 a share.
It’s important to understand that one overly optimistic or one overly pessimistic call can really skew the average, or “mean.” That’s why for the most part you want to follow “median” figures but should always take note of the disparity between the two as a sign of how much in agreement (or disagreement) the analyst community is on a given stock.
Play it Safe: Be a Pessimist
To be on the safe side I would actually recommend always using the worst-case scenario estimate, and basing your analysis on the lower of the two figures. And if you really want to be rigorous, take the lowest target of all — since the absolute low estimate is explicity listed for you.
You might be surprised to find that for some stocks, every single analyst is expecting upside from here. That’s not a guarantee of gains, of course, but it’s certainly attractive. Take the aforementioned McDonald’s (NYSE:MCD) estimates, where the lowest call on record is $95 — less that $2 under current pricing. That’s not a guarantee MCD stock won’t ever go lower than $95 … but it’s certainly a plus to see that’s the lowest of the Wall Street targets.
It’s also worth noting that this data in Yahoo! Finance is culled from months of analyst ratings. So check the timeline below to see if there are any upgrades or downgrades in the past few weeks. Take this image of Chipotle’s upgrades/downgrades – showing that most of the recent moves have been positive in nature. That could indicate that someone set a price target months ago but hasn’t revised it up yet. The reverse also holds true for stocks – if there are a spate of downgrades, it may indicate that recent news has significantly altered forecasts and the targets could begin creeping downwards soon.
Always guard against investing based on stale analysis. Place precedent on the most recent ratings.
And, of course, check to make sure there are more than just three or four analysts weighing in. The average of a small group is no better than a shot in the dark.