Target prices
As a hedge fund professional, what do you think of target prices, either from the sell side, or from the analyst pitch to the PM, or others? I know buyside doesn't care about sell side price targets but I'd wager the PM would care somewhat about his analyst's PT.
I think really fleshing out this question would thoroughly evaluate the ER industry and its value add. Maybe that's just me
Appreciate your curiosity as you are an intern, but there really is not a lot to add to this topic. PT's exist on the sell side because there needs to be an "output" as a product, but almost everyone recognizes it does not carry much weight - as you mentioned.
SS ER value add comes from: initiation and summary reports that help to distill and filter an awful lot of knowledge + information to help everyone get up to speed on the facts and arguments that are largely already baked into the price - basically setting a framework for consensus and the main debate points (although that does not mean they always get that part right as well). The next, and arguably more important value add, is being a middle-man for arranging access to management teams + conferences, and also being someone you can call to get more color on buyside sentiment + management sentiment. Good/great SS ER analysts can significantly accelerate the time it takes to get up to speed on a name, understand the sentiment around the name / peer group, and start building a relationship with management. Great ones can also be experts on an industry, and can help provide color on industry issues. PTs here are driven by consensus estimates essentially... Now one especially bullish analyst might be the high end of that range, and understanding their argument important, but you get the gist.. This output price does not matter because....
PTs on the buyside: well there are no hard and fast PTs because no one approaches investing like that. Everything is probability and range based, and is constantly changing as well. You don't tell your PM this price is the hard and fast price that the stock could be worth in 12 months; you are framing the possible valuation ranges and risk/reward outcomes. Almost every pitch you do will probably include a bear/base/bull outcome at a minimum, but it is less about those specific PTs and more about everything else - what are the ranges?, do you have an advantaged risk/reward based on those ranges?, what is baked in/not baked in?, what are the catalysts, is the catalyst mis-priced?, etc.? Again, there may be actually a specific price target here, but it is an output of the process, everything else surrounding it is much more important. and everyone generally views things based on ranges.
Great answer. I know it's just an output of the process and thus doesn't garner much serious attention by professionals rather than the process, but I tried looking up on the literature in places like Financial Analysts Journal on systematic biases in price targets and to little surprise there weren't many studies on this area (could only find one). I wonder if doing research such as collating all the sell-side price targets that ever existed (and buyside if anyone manages to find any) and evaluating the final accuracy of their price targets (and stock recommendation/ pitch as a whole); looking for any discernable, systematic biases in price targets; or even looking for any trends like let's say relation between the analyst's choice of model and the accuracy of the valuation - would be of any interest for researchers and academics.
Just curious. For me, this is essentially back-testing the sellside and piques some interest
Asked my MD about this and he said there's no research because no one would give a shit lol
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