When looking up a quote for a stock, you might notice that a “target stock price” is immediately listed. This target stock price is typically an average of the price targets of the various analysts that follow the company. Stock analysts are professionals who follow a company and then publish recommendations concerning the company’s stock.
What do stock analysts do?
Stock analysts are typically assigned to follow a particular industry. They develop a detailed knowledge of the industry and the different companies within it. When covering a specific company, they will have a detailed understanding of the company’s business, financials, management, and how the company is positioned within the industry.
After following a company, the analyst will do several things:
Publish research reports.
Set a price target.
Set a buy, sell, or hold recommendation. This is a general recommendation for investors to buy, sell, or hold the stock.
Different types of stock analysts
The type of analyst described above would be consistent with analysts who work for investment banks who are trying to sell financial products and services (called “sell side”). This contrasts with internal analysts who work for money managers who are the purchasers of the financial products and services (called “buy side”). A “buy side” analyst who works for a money manager will rarely be publishing their opinions about every company in an industry and setting price targets publicly.
Why do “sell side” analysts give their research away?
The price targets and buy/sell/hold recommendations set by “sell side” stock analysts are typically free. Their research reports can also be free. Why are the “experts” giving away and publishing their opinions and research for free?
The idea is that if a “sell side” analyst publishes good research, “buy side” firms will be encouraged to trade or engage in investment banking transactions with the analyst’s firm. The research will indirectly generate revenue through selling these products and services.
Should you listen to stock analysts?
The research and recommendations published by analysts have been criticized by famous investors. At the very least, I think it is appropriate to be very skeptical about research being given away for free. I also do not understand how recommendations to buy/sell/hold can be given so widely, without considering the entirety of an investor’s portfolio.
Also, if the “experts” all agree on the target price, why is the current stock price typically so different? "Buy side" investors, many of whom are part of institutions managing billions of dollars, apparently disagree with the analysts. The next time you see a “target stock price” freely available as part of a stock quote, definitely do not assume that it is likely to come to fruition.
If you have any comments, questions, or ideas for future posts, please let me know
I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.
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