When I look to analyze individual securities, I always look at what the analysts have to say. Why? Well, these are the professionals, the ones who are supposed to be experts on these names. Occasionally, I laugh at certain names, because the average price targets seem unreachable. Today, I'm going to discuss five names that I feel fit in this category. Now, I'm not saying that you shouldn't buy these names, or that they won't increase in price over the next say 6-12 months. What I am saying is that you shouldn't have ridiculously high expectations on these names just because analysts see them going to a certain level in the next year.
Google (GOOG): I recently wrote about Google, saying you can still make money on the name even if it is stuck in a range. Over the past two years or so, Google has traded, with a few exceptions, between $450 and $650. Over the past six-eight months, I've recommended buying the name near $550 and shorting it above $625. That has worked well for those who listened.
To me, Google is just stuck in a range. Despite the fast-paced growth of both its revenue and earnings, the stock has done nothing in two years. In fact, Google has underperformed the Nasdaq Index by more than five full percentage points over that time. I've argued for months for a true stock split, but Google won't do that. Until it does, I'm not sure how quickly this stock can actually rise.
Google just finished its extremely large acquisition of Motorola Mobility, and recently announced big changes to its shopping business. The effects are yet to be seen, but I don't think they will boost the stock as much as some expect. Two years ago, analyst price targets on Google were $700 to $800. It didn't get there. Six months ago, I laughed when the average price target on the street was at $700. Now the average price target is at $750. Not only has Google's stock not gone up, but I don't see any reason for the additional $50 of expected growth. At $570 currently, I don't see that much upside.
Baidu (BIDU): Strangely enough, the Chinese version of Google sits in the same category. I am a bit more bullish on Baidu though, just because it is growing much faster than Google at the moment. Between 2012 and 2013, Baidu is expected to more than double both revenue and earnings over 2011 levels. It still has plenty of growth ahead, which includes growth coming from an expected smartphone the company plans on launching.
The average price target sits at $185 currently, which is roughly 57% higher than current levels. To me, that is very unreachable in the near future, and maybe not even for 18-24 months or more. Baidu's 52-week high was set during late summer of 2011 in the mid $160s, and the stock has spent much of the past six months below the $140 level. China is slowing, and I think expectations need to come down a little. Baidu actually missed Q1 revenue numbers and guidance was a little light for Q2. I like the stock and its growth potential, but you shouldn't expect this name to see $175 to $200 anytime soon.
Ford (F): I wasn't in favor of Ford earlier this year when it was at $12 or $13, and I'm still not totally sold on this sector in general. Friday's jobs number was terrible, and automakers posted disappointing sales numbers. The U.S. recovery is going much slower than expected, and we all know about the problems in Europe.
Ford is expected to post nearly 3% revenue growth this year (although that may get knocked down after May numbers), but earnings are expected to decline by two cents. Revenue and earnings growth are expected to rise faster in 2013, but that again depends on a good global recovery. I'm not completely sold on that yet.
Now again, I'm not arguing against Ford here. Obviously, I don't want to see it struggle, and I'm not saying short the stock, especially after the latest move downward. I said short at $12.75, and if you did, you probably should take your gains. Ford's 52-week high is $14.22, and that's about 40% higher than current levels. Even higher is the average price target, which sits at $16 currently. I can see some growth for Ford ahead, but I don't see anything making this company nearly 60% more valuable in the next year or so.
Molycorp (MCP): Shares of the rare earth mineral processor and producer sit near 52-week lows currently. The company's Q1 results were good, but not great, and the company announced a huge debt deal to finance the acquisition of Neo. The 10% interest rate on the debt will have a large impact on profits in the short term.
The Neo acquisition is a very bold one. Molycorp is trying to grow rapidly, and if the growth continues, interest costs won't have as much of an impact on profits say five years from now. However, Molycorp's growth has not been as fast as expected in the past year. Just in the past 90 days, 2012 earnings expectations have been lowered (by analysts) from $1.82 to $1.36, and 2013 estimates have been cut from $4.94 to $3.03.
The average price target sits at $38.60 currently. That's more than 80% above where shares stand today, and one analyst even has a $60 target on the name. Yes, the 52-week high is near $67, but shares have not traded above $35 in the past six months, and have spent most of that time below $30. Each earnings report seems to be another leg down for the stock. I really like the company's growth potential, but it keeps getting taken down each quarter. I don't see the stock doubling in the next year unless the company can hit its marks, something it has not been able to do recently.
Amazon (AMZN): As much as I love using the site, the valuation just does not make sense to me. Also, there are more problems than I thought just a few months ago. Amazon is growing revenue at 30% annual clips, but earnings are declining, and profit margins are below 1%. Amazon is not making any money right now, and that problem is only going to get worse.
Amazon is going to become less competitive as it charges sales tax in more and more states. It was recently announced that New Jersey, would have to pay sales tax on Amazon starting sometime in 2013. I just can't see how it won't affect the company's sales. I don't think Amazon will cut prices to help consumers, and if it does it just will affect margins.
Amazon's price target is north of $255, which is about $10 above the 52-week high. I don't even think we should be trading above $200, let alone $250. A P/E close to 200 is ridiculous. If Amazon releases a new Kindle version this year, earnings could fall even more. The valuation argument gets worse and worse.
Conclusion - Keep Expectations Realistic:
Remember, I'm not saying these names can't increase in price. What I am saying is don't always look at price targets when buying into a certain name. Google is the classic example. Analysts have been calling for the name to hit $700 for the past two years, and we still haven't gotten there. These names can rise, but don't expect 50%, 60%, or even 100% growth as a definite. You'll be disappointed.