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Lately, When Analysts Say Buy, It Has Paid to Do What They Say

Lately, When Analysts Say Buy, It Has Paid to Do What They Say

The best route to success has been simple in stocks of late. If an analyst raises a price target, you buy.

Of 17 so-called equity factors -- traits and qualities by which stocks can be categorized for investment purposes -- the one that groups companies according to the biggest analyst price-target revisions is the best performing over the last week. The larger the change to sell-side expectations for share prices, the better the returns.

Whether stock handicappers are flexing newfound influence or hyper-bullish investors are just looking for any excuse to buy, gains attributable to improving Wall Street sentiment are starting to drown out other catalysts. The situation hearkens to past periods of froth, most memorably the late 1990s internet bubble, when star analysts like Henry Blodget ruled the stock-market roost.

“It’s a feedback loop that can be dangerous,” said Matt Miskin, co-chief investment strategist at John Hancock Investments. “Momentum creates this fear of missing out for investors.”

Lately, When Analysts Say Buy, It Has Paid to Do What They Say

In the past week, a portfolio that goes long U.S. companies with the largest three-month upward revisions to their analyst price-targets, while shorting those with the most negative changes, has gained 2.7%. The trend was in evidence on Tuesday: The group of stocks with the most optimistic upgrades rose an average 2.4%. The bottom bunch fell 0.3%.

Take Peloton Interactive Inc. for example. A JPMorgan Chase & Co. analyst said Wednesday morning that shares of the fitness-bike maker could reach $105 by December 2021, and the stock popped 10%. In the last three months, consensus estimates for Peloton had already risen 31% from $51 a share to $67 -- making it one of the firms with the most optimistic revision sentiment. Over that period, the stock surged more than 80%.

After a blowout earnings report from Zoom Video Communications Inc. earlier this week, analysts boosted their price predictions. The consensus estimate for the stock now stands at $384 a share, about 67% higher than what was forecast just a week ago. Zoom jumped roughly 40% Tuesday, and is now up more than 500% in 2020.

Other stocks in the group with the largest price-target revisions include Tesla Inc., Etsy Inc., DocuSign Inc., Apple Inc. and Amazon.com Inc.

Of course, the relationship may be amplified by an interconnected circuit. It’s difficult to disentangle if share prices are rising as a group solely because analysts are upping their price targets, or if analysts are just playing catch-up as companies report good news and their stocks relentlessly surge.

At Home Group Inc., an operator of home-decor stores, has seen its consensus analyst price-target surge the most among U.S. companies -- up more than 520% in the last three months to $19.60. Over that period, the firm valued around $1 billion surged 384% to over $23 a share. At Home released a strong earnings report Tuesday, showing a 42% gain in quarterly comparable sales. Jefferies analyst Jonathan Matuszewski raised his price target to $22, yet warned clients about chasing the stock.

To Michael Hans, chief investment officer at Clarfeld Citizens Private Wealth, the trend is one of the developments that point to possible market froth.

“The durability and how sustainable some of this is is challenging,” said Hans. “It’s amazing, you just look at what prices were just a few months ago.”

©2020 Bloomberg L.P.