Skip to main content

Sound Advice: March 27, 2024

“Barclays cut Apple’s rating to underweight and trimmed its price target to $160 from $161.”

That kind of headline coming from what might be considered a respectable financial institution is worthy of nothing more than an eyeroll.  A $1 cut?  Really?  Why not a 52¢ cut or some other adjustment of equal embarrassment.

Although Wall Street analysts tend to fantasize about their ability to project the future, there is no reason to believe they have any gifted vision of what’s to come.  Much of the work done by analysts focuses on prospective rates of growth in revenues, earnings, and capital expenditures needed to support the accelerated pace that may be developing.

Within the broad parameters of looking ahead, one might be tempted to work the way downward through a profit and loss projection to specify a range of profitability that may be within reason several years down the road.  Applying that range to the stock’s recent rates of valuation (price-earnings multiples) would yield a band of prices that might be attainable ahead.  That approach is what points toward price targets.

All of which are utter and complete nonsense.

Perish the thought of people sufficiently naïve to believe that portfolios should be constructed of stocks with the broadest differential between current prices and those silly target prices.  The variables involved are far too shaky to give serious thought to using such an approach.

The profit and loss picture alone is a minefield.  Simply extrapolating current trends is nothing more than rolling the dice.  What’s strong today may be weak tomorrow.  What about the possibility of increased competition or changes in tax rates?

And then there’s the matter of valuations.  Stock valuations are heavily dependent on company growth rates. Over time, company growth rates tend to moderate as volume increases.  That’s known as regression to the mean.  As growth rates slow, investors’ expectations are lowered and valuations shrink.

If profits continue to expand, that expansion needs to be generated by higher ongoing revenues.  When reported profits climb without a proportionate jump in revenues, it’s likely that this increase is from a nonrecurring item (e.g., sale of assets), which has no impact on a stock’s price.  Recurrence is the key.

The formula is straightforward: As earnings rise, so will stock prices over time.  The critical phrase is “over time.”  In the interim, volatility is always part of the equation.

Bottom line: Any analyst foolish enough to present precise miniscule changes to prospective stock price targets would be better served counting grains of sand on a beach.  It’s OK to be a fool, but please don’t prove it.

N. Russell Wayne

Weston, CT

Any questions: please contact me at nrwayne@soundasset.com

203-895-8877

www.soundasset.blogspot.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...
Post a Comment
Read more

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...
Post a Comment
Read more