Investing

Recovery Coming or Not, Get Ready for Analysts to Slash Price Targets

Many investors are trying to figure out if they should run for the hills or if they should be looking for bargain stocks to buy. A 500 point sell-off in the Dow Jones Industrial Average on Friday took the index to where it is finally down 10.3% from its peak — the first 10% correction in roughly four years. The S&P 500 fell almost 65 points on Friday to 1970.89, and it is now down 7.6% from its high.

It is almost impossible to predict a bottom in a market. That is not the point nor the effort here. What is not likely hard to see coming is that all those much higher consensus analyst price targets for the big stocks will have to adjust lower. Analysts may maintain Buy and Outperform ratings, but it just is not possible for a multi-week sell-off with this many concerns to allow analysts to ignore the reset that has taken place and keep their aggressive price targets.

There are several different issues that are causing the broader sell-off. One is the continued dollar levels hurting U.S. exports and hurting revenues and earnings, another is China’s weakness and simultaneous devaluation, and still another is that the stock market was simply overvalued. There is also the uncertainty of when the Federal Reserve finally will raise interest rates, and there remain concerns about Greece and Europe. The threat of deflation and lower oil prices continuing as well. Yes, it is a global market and the excuses are many.

So, how will this work? If you want to see what happens when analysts dial back on their price targets, two case studies would definitely be Micron Technology Inc. (NASDAQ: MU) and Alibaba Group Holding Ltd. (NYSE: BABA). Our company tab in Alibaba shows a sudden pullback of analyst price targets in Alibaba all at once, but the company tab on Micron shows a gradual and continual series of price target reductions and downgrades, even while many analysts have tried to maintain their Buy and Outperform ratings.

ALSO READ: 5 Defensive High-Yield Stocks to Survive the Sell-Off Carnage

Here are three more stocks in which analysts are likely to be forced into lowering some of their big upside price targets after the pullbacks that have now been seen.

Amazon.com Inc. (NASDAQ: AMZN) pulled back by 4.1%, or $21.31, to $494.47 on Friday. That is down from a peak of $580.57. Analysts stepped all over themselves to raise their price targets after it blew away earnings. They went so high that the consensus analyst price target is now $650 — and the $750 high price target would now imply 50% upside. With nosebleed valuations, analysts can still maintain their Buy and Outperform ratings, even if they decide to dial back on their price targets.

Apple Inc. (NASDAQ: AAPL) is the biggest company in the world by market cap and profitability. We have only just started to see the downgrade cycle start in Apple shares. After a 6% drop on Friday to $105.77, Apple is now down 21% from the $134.54 high share price. That is making all of those price targets of $140, $150 and $160 and so on feel too lofty. The consensus target is listed at almost $147 now, and the highest of all analyst price targets is $195. With its $600 billion market cap, analysts will continue to get a bit less aggressive.

Boeing Co. (NYSE: BA) is another case where the pullback has made the jet-maker and defense stock look cheap. It sold off almost 4% to $131.71 on Friday, and it is now down over 20% from its peak of $158.83. That makes the consensus price target of just over $165 seem very high, and the $196 street-high analyst price target just feels way too far out of grasp, as it would mean a gain of over 50%, if you include the dividend.

ALSO READ: 4 Defensive Stocks to Buffer Against Sell-Offs

Seeing analysts trim their price targets after high valuations or after a big pullback is nothing new. It also should not be that surprising. After all, if a traditional analyst upgrade or initiation with a Buy or Outperform rating is 8% to 15%, then they cannot stick with that previous high target if a stock pulls back 10% or 20%. It just isn’t realistic.

Above are just some of the examples. Many other companies also will be seeing analysts trim their price targets on their stocks.

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