Accuracy of European Stock Target Prices

Joana Almeida,Raquel M Gaspar

doi:10.3390/jrfm14090443

Abstract

Equity studies are conducted by professionals, who also provide buy/hold/sell recommendations to investors. Nowadays, target prices determined by financial analysts are publicly available to investors, who may decide to use them for investment purposes. Studying the accuracy of such analysts’ forecasts is, thus, of paramount importance. Based upon empirical data on 50 of the biggest (larger capitalisation) European stocks over a 15-year period, from 2004 to 2019, and using a panel data approach, this is the first study looking at overall accuracy in European stock markets. We find that Bloomberg’s 12-month consensus target prices have no predictive power over future market prices. Our panel results are robust to company fixed effects and subperiod analysis. These results are in line with the (mostly US-based) evidence in the literature. Extending common practice, we perform a comparative accuracy analysis, comparing the accuracy of target prices with that of simple capitalisations of current prices. It turns out target prices are not better at forecasting than simple capitalisations. When considering individual regressions, accuracy is still very low, but it varies considerably across stocks. By also analysing the relationship between both measures—target prices and capitalised prices—we find evidence that, for some stocks, capitalised prices partially explain how target prices are determined.

Highlights

Millions of shares are traded daily on world markets
We look into three types of pairwise relationships: (A) future prices (FP) vs. target prices (TP): we evaluate the accuracy of TP forecasts made by analysts. (B) FP vs. capitalised prices (CP): to compare the accuracy of a forecast as naive as CP to analysts’ TP forecast. (C) TP vs. CP: to evaluate to what extent TP can be determined by CP
Is true we find no forecasting power in the simple capitalisation rule forecasts (from Equation (1))—the fourth column of results in Table 3—as we observe an R2 of 0.001, in this case the coefficient associated with the dependent variable is at least statistically different from zero;

Summary

Introduction

Millions of shares are traded daily on world markets. Investors who buy and sell shares wonder if they are trading at the right/fair prices.Defenders of market efficiency would claim market prices are “fair” by definition and that there is no added value to stock picking. Millions of shares are traded daily on world markets. Investors who buy and sell shares wonder if they are trading at the right/fair prices. Defenders of market efficiency would claim market prices are “fair” by definition and that there is no added value to stock picking. Financial markets are full of financial analysts that keep analysing stocks and providing buy/hold/sell recommendations, suggesting it is possible to “beat” the market by investing according to their advice. These analyses typically provide so-called “price targets”. According to Bilinski et al (2013), “a target price forecast reflects the analyst’s estimate of the firm’s stock price level in 12 months, providing easy to interpret, direct investment advice”

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Conclusion