Seeking Alpha
Value, contrarian, long-term horizon
Profile| Send Message|
( followers)  

Summary

  • On Wednesday MKM Partners initiated coverage with a 'Buy' and a price target of $18.00, which Reiterated The Jefferies Group's Rating from earlier this month.
  • We took a look at over 130 different analyst price targets during the last 2 years and plotted them against the actual subsequent price averages.
  • Based on this analysis we put together a regression model with 72.6% accuracy to interpret the analyst price targets showing that they trend on the high side vs. actual prices.
  • We have included our data sets and our own analysis in Excel for your own download and future use.

Bank of America (NYSE:BAC) has been marked a 'Buy' by David Trone an analyst at MKM Partners an institutional equity research and trading firm as they initiated coverage of the stock on Wednesday. The price target set by MKM Partners was $18.00. In a similar manner, The Jefferies Group has a price target of $18.00 for BAC as well, while Guggenheim has a price target of $17.00. All three of these price targets were set in May and are above the currently trading price for BAC. Is this typical for BAC? What is the trend and historical relationship between the analyst valuation and the subsequent actual price? What does a historical analysis of price targets and their subsequent relationship with the actual average stock price seem to indicate? It is hoped that through a brief analysis of how these two variables relate, that we might be able to better interpret the analyst price targets.

Within this article, we present a regression model that utilizes the price targets of analysts as the independent variable and we look at the relationship of the price targets with the subsequent historical average actual price of the stock (which is our dependent variable). There is a 72.6% level of accuracy with respect to how price targets explain the change in the actual average prices over 3 months subsequent to the analyst announcement based on our regression model. We also did this for 1 week, 2 weeks, 1 month, and 2 month average price subsequent to announcement. You can download this analysis in Excel right here.

Analysis of Data:

We put together a regression model based on over 130 data points and we plotted these below along our X-Axis to see what relationship the analyst price target had with the actual average price of the stock over the subsequent 3 months which we plotted along the Y-Axis.

The dark purple are the plotted points that show the actual historical average price for 3 months after the price target announcement which are plotted along the x-axis. The lighter points and the trend line show points that predict the values of the dark purple based on the trend of the analyst price targets. This regression line has a 72.6% level of accuracy in establishing a relationship between the analyst price targets and the 3 month actual average price.

From the regression line, we can tell that analysts tend to be slightly higher than the resulting price of the stock with respect to their target pricing. Our regression line has a slope of 0.594189 and a Y-Intercept of 4.915399. As a means of interpreting the future value of analyst price targets with respect to BAC based on this regression model we utilize the well known formula y = mx + b. The price target of the analysts is our independent variable or 'x' and the dependent variable value which we are solving for is 'y', with 'm' being our slope and 'b' being our y-intercept. Consequently based on the MKM Partner's price target and the Jefferies Group's price target of $18.00 we can easily see that the projected price would be $15.61 (or y = 0.59*18 + 4.92). One could conduct this same calculation with respect to any BAC price target in order to find the subsequent expected value.

Conclusion:

At the current price of roughly $15 this might indicate that BAC has some upside potential, even if it is limited. However because of the historical trend of analysts whom project higher than subsequent actual prices for BAC, we should not expect BAC to hit $18.00 within the next 90 days. This doesn't mean that BAC will not hit $18.00 within the next year, but based on the historical trend, we should be expecting only about a $0.50 increase in the near future. So if you are looking for a quick increase based on the analyst projections, it will be a long while in coming.

Source: Bank Of America - How To Interpret The Analyst Price Targets