Criticism of Target Prices - New York Times Article

http://query.nytimes.com/gst/fullpage.html?res=9F05E1D8123CF936A3575BC0A9679C8B63&sec=&spon=&pagewanted=all

MARKET WATCH; Price Targets Are Hazardous to Investors' Wealth

By GRETCHEN MORGENSON
Published: August 5, 2001

Important Points Made

On Dec. 5, 2000, Andrew J. Neff, a computer analyst at Bear, Stearns, issued a report on Palm Inc., with a 12-month price target of $80 on the shares, reflecting his belief that they would trade at 19 times his 2001 sales estimate for the company.

By the next week, Palm shares had climbed to $56.625. But then they began to sink, until, on Jan. 3, they had reached $27.88. That day, Mr. Neff cut his target to a range of $37 to $48. Two months later, with Palm in the mid-teens, Mr. Neff lowered his target again. Finally, on May 17, the shares stood at $7.05 when he slashed his target to around $5. It closed on Friday at $5.36.

This is an example of the assignment of target prices that were based more on fantasy than reality.

According to Stefan D. Abrams, chief investment officer for asset allocation at the Trust Company of the West in New York, these target prices could not be defended by any rational means and these were nothing more than sales hype.


Early in the mania, of course, investors who bought stocks based on wild targets did well. Amazon.com blew through Henry Blodget's famous $400 target about a month after he assigned it in December 1998. And for every seemingly crazy target that was subsequently met, the next one became more credible.


Big and bold price targets are a relatively new phenomenon in Wall Street research reports. In the 1980's, an analyst might estimate a range within which a stock could trade, based on what the analyst expected the company to earn. But such targets were low profile and typically surrounded by caveats.

Robert A. Olstein, manager of the Olstein Financial Alert fund, said ''Today's analysts are soothsayers, because they're trying to predict where the crowd frenzy is going to take a stock,''

Said Mitch Zacks, vice president of Zacks Investment Research in Chicago, ''The price target is the piece of data produced by Wall Street that is least tied to reality,''

RiskMetrics, a software analytics company based in New York that specializes in risk assessment for the financial community, recently conducted a study for Money & Business that examined 550 price targets assigned to some 300 technology stocks as of June 22. It looked at five major Wall Street firms' targets for companies in computer software, hardware and semiconductors, and calculated the probabilities that these targets would be met within the next 12 months. The firms are Goldman, Sachs; Merrill Lynch; Morgan Stanley Dean Witter; Prudential Securities; and the Salomon Smith Barney unit of Citigroup.

While many of the targets had a better than 50-50 probability of being met based on past price action, 46 companies carried targets that had less than a 20 percent chance of being hit.

''There's no consistency even within a brokerage house in the creation of a price target,'' said Michael Thompson, RiskMetrics' global market commentator. ''Too many times, these things come out of the air.''

The RiskMetric study showed that the Prudential analysts had the highest percentage of price targets that were most likely to be reached -- 67 percent. Salomon Smith Barney took second place with 64 percent, followed by Merrill Lynch at 58 percent and Morgan Stanley at 57 percent. Goldman was last, at 49 percent.

A word of caution on these figures: this study was focused on one sector of the economy and based on data collected without the firms' help. The results could be quite different for research in other sectors.