Six months ago, I wrote an article about seven stocks that all had 1 year target prices more than 80 percent higher than their current prices. These seven stocks were Manpower Group (NYSE:MAN), Delta Air Lines (NYSE:DAL), Ford Motor Company (NYSE:F), TRW Automotive Holding (NYSE:TRW), United States Steel (NYSE:X), United Continental Holdings (NYSE:UAL), and Goodyear (NYSE:GT).
In this article, I evaluate how these stocks have performed in the past six months and lived up to their growth expectations. The following performance results are from the close of August 26th, 2011 to the close of February 28th, 2011. The S&P 500 was up 18.37 percent during this time. Expected share price growth is the square root of the stock's 1 year target on 8/26/2011 divided by the stock's closing price on 8/26/2011.
The seven stocks returned an average of 20.45 percent, beating the market, but falling short of the portfolio's expected return of 36.82 percent. Four of the seven stocks beat the market in these six months and only one, Delta Air Lines, beat its analyst price target. Only Delta Air Lines and United Continental Holdings had their one year price targets increase in the last six months.
This little experiment has some important takeaways. Regardless of what price targets are, each stock individually has an expected return similar to what the market is expected to return. According to the CAPM model (which I know many of you don't believe), these expected returns vary based on each stock's Beta. No stock has a Beta that can justify an 80 percent expected return. If a stock did have a reasonable expectation to grow by 80 percent in one year, investors would theoretically buy it up until the price increased to a level that warranted more realistic returns.
This experiment also provides some insight on how to use price targets to become a better investor. Price targets are normally similar by industry and they are a good way to gauge a stock's risk. It helps investors identify potentially overvalued or undervalued stocks and serves as a litmus test for further analysis. For example, all of these companies except for Manpower Group are heavily dependent on the state of the transportation industry. All of them had an unprofitable year since 2008, and are expected to be profitable for the forseeable future. From this analysis, an investor can know exactly where these kinds of stocks fit in their portfolio, and from further analysis, make the best picks from this bunch and have a better chance at beating the market long term.
Manpower Group (MAN) shares are up 14.95 percent in the last six months, compared to an expected 40.48 percent. The stock had a strong run in October and then had a horrible bear run after announcing a share repurchase program. Its new target price is $52.23, way down from its $75.45 estimate from one year ago.
Delta Air Lines (DAL) shares are up 44.95 percent in the last six months, beating an expected growth of 38.97 percent. The stock did well after the bankruptcy of AMR Corporation last year. The airline industry is always volatile and riddled with worries, but Delta is considered to have the best service of the big four airlines, and is probably the best buy right now compared to United Airways (LCC), United Continental Holdings, and AMR Corporation. Its current one year target price is $14.69, up from $13.75 one year ago.
Ford (F) shares are up 19.16 percent in the last six months, falling short of expected share growth of 37.17 percent. The stock has been performing great, but missed earnings twice. I am very bullish on the stock right now and believe Ford is making a much better product than they did five years ago. Its current one year target price is $15.93, down from $19.57 six months ago.
TRW Automotive (TRW) shares are up 24.14 percent in the past six months, falling short of an expected 36.4 percent increase. The stock experienced a bear run in November and December after missing earnings, but has since gotten its business on track and meeting expectations again. Its current one year target price is $62.33, down from $70.44 six months ago.
United States Steel (X) shares are up 5.28 percent in the last six months, falling very short of the market, and its 35.33 percent growth expectation. I believe that it is definitely one of the weaker Dow components, and I'm very bearish on the stock. Its current 1 year price target is $35.21, down sharply from $50.46 six months ago.
United Continental (UAL) shares are up 20.98 percent in the last six months, falling short of its estimated growth of 34.84 percent. Like Delta, United Continental had some very bearish activity and has bounced back after the AMR bankruptcy. Also like Delta, the company's one year target price has increased, from $32.58 six months ago to $33.58.
Goodyear (GT) shares increased by 13.69 percent in the last six months, falling short of its growth expectation of 34.55 percent. The stock had an initial spike followed by bearish activity since the end of October. The problem that I see for Goodyear is the inability for common stockholders to reap any benefit from the company. It pays no dividend, but has piles of debt and preferred shares that return 5.875 percent. For a mature company, this is very weak and I expect bearish activity to continue. Its 1 year price target dropped to $17.38 from $21.38.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.