Broker Forecasts and Share Price Targets from investment analysts provide a view as to their expectations for the future performance of a business. Issued over a period of time, they look to either reiterate their existing view, upgrade their view on the share or downgrade it.
There are a variety of qualitative and quantitative techniques these investment analysts will use – including meetings with management and complex financial modelling to predict the future performance of a business.
Let’s start with the ratings – being overweight is actually a good thing here…
When viewing share information at your Online Broker, you will often see a ‘Broker Consensus’ – this summarises the view of investment analysts based on whether they believe investors should buy, hold or sell a share (in relation to the make-up of your current portfolio):
- Strong Buy, Buy – A Strong Buy is the highest view you will find on the prospects of a share from investment analysts. Shares with a Strong Buy / Buy rating indicate that returns are expected to be 10% or greater.
- Overweight, Outperform – Below the outright Buy recommendation, you will find the concept of ‘Overweight’ or ‘Outperform’. Broker ratings are generally referred to in the context of how you should balance your existing portfolio. So in this context, the ‘Overweight’ rating is suggesting to hold more shares in your portfolio in a particular business. Returns are expected in the region of 5-10%.
- Hold, Neutral – Shares with a Hold or Neutral recommendation indicate that your holding in a particular share within your portfolio should equal other holdings within the respective sector. Returns could be in the region of -5% to +5%. Again, you should note this is all relative to the index a share is listed on or sector it is associated with.
- Underweight, Reduce – This is the equivalent of Overweight but for when things don’t look as promising. So the returns here are expected to be -5% – 10%.
- Sell, Strong-Sell – This is the worst recommendation, if you are invested in a share with one of these ratings, then it implies that you should hold less of the shares (but not necessary sell all). All these Forecasts and ratings are in relation to the make-up of your portfolio. Returns here are expected to be -10% and more.
Share Price Targets: the magic behind the numbers
In attaching a rating to a company, investment analysts from investment banks and brokers will try to determine the future of earnings of a company. They will use financial models based on assumptions regrading the future of a business and make use of Discounted Cash Flow techniques to try and reflect what a business is truly worth. These analysts also have access to the management of a company and can ask probing questions to help make their forecasts more accurate.
As an investor, you will often see these in the news or on the research part of a website alongside a general buy, sell or hold recommendation.
Can they help you buy or sell a share?
They can give you a view – if a buy rating is put on a share and the target price is say 30% higher than today’s price, it suggests it is undervalued and a potential opportunity to buy. Likewise, if you see analysts changing their recommendations rapidly to a sell with a target price that is lower than today’s price – it could be a time to sell depending on the perceived severity.
Broker Forecasts and Target Prices can and do significantly move the price of a share – a sell rating is effectively a recommendation for a client to sell the stock, thus reducing the demand and pushing down the price.
However, the movement varies. There are usually 5 or more Investment Analysts covering a share – and they may well have different views on the prospects of a business!
Should you trust the views of brokers?
For all their complex analysis, investment analysts get it wrong! This is why you will see broker forecasts differ so much. However, you should naturally be cautious if 9 analysts have a strong-sell on a particular share you hold or there has been some severe downgrades.
Share Price Targets and Broker Forecasts are worth keeping an eye on – they are a usual data point (like many others) to help influence a decision. They could support or reinforce your thinking about whether a share is undervalued or overvalued.
However, Broker Forecasts and Share Price Targets vary! Some will be right, some will be wrong – but it’s for this reason that the Stock Market functions because nothing is certain.