Why Analysts Will Slash Price Targets Even If They Keep Their Buy Ratings

Monday was another ugly day, following an ugly Friday. Amazingly, the sell-off impetus was identical as prior days. Now the question is whether we are starting to find a bottom or if the market is heading even lower. Do investors try to get greedy or do they run for the hills?

24/7 Wall St. sees many analyst upgrades and downgrades each morning, and the selling carnage that has been seen almost certainly will generate one outcome: slashing of upside price targets, even if Buy and Outperform ratings are maintained at the major firms.

This is the first correction for the Dow Jones Industrial Average and of the S&P 500 of more than 10% in roughly four years. That being said, it is almost impossible to predict a bottom in a market. No effort is being made to call a bottom either. Still, what seems almost certain is that analysts on Wall Street likely will maintain Buy and Outperform ratings on their favorite top stocks, but they also will start dialing down some of their massive upside price targets.

If you want to see what happens when analysts dial back on their price targets, two recent cases would be Micron Technology Inc. (NASDAQ: MU) and Alibaba Group Holding Ltd. (NYSE: BABA). A look back at Alibaba shows a sudden pullback of analyst price targets in Alibaba all at once, and it now finally has busted through its IPO price to the downside. In Micron this happened over a longer period, but with many analysts keeping their Buy ratings and positive valuation calls while they ratcheted price targets ever lower.

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So, here is how this should work for the likes of Boeing, Apple and Amazon.

Boeing Co. (NYSE: BA) is one key case in which analysts remain positive but may need to dial down some upside projections. After being as low as $127 on Monday (without considering the lows supposedly under $120 for a few minutes), Boeing’s stock is now down about 20% from its peak of $158.83. Suddenly, the consensus price target of just over $165 seems very high — and the $196 street high analyst price target just feels so high that it seems unattainable, as it would mean a gain of over 50%. Inc. (NASDAQ: AMZN) was down over 4% late on Friday and shares were down another 5% at $470 after the dust settled on Monday. That is down from a peak of $580.57, and many analysts were busy stepping all over themselves to raise their price targets after it blew away earnings. They went so high that the consensus analyst price target is still $650, and the $750 high price target now would imply over 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 by $50 to $75.

Apple Inc. (NASDAQ: AAPL) managed to go positive on Monday, but even without the most extreme prints considered, Apple was still under $100 earlier on Monday morning. We have only just started to see the downgrade cycle start in Apple shares. Apple was down about 25% earlier, and shares are still down roughly 20% from the $134.54 high share price. Now think about what those big upside price targets of $140, $150 and $160 and so on feel like now. The consensus price target is listed at almost $147, and the highest of all analyst price targets is still all the way up at $195. With its $600 billion market cap, it just seems as though analysts will continue to get a bit less aggressive.

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Again, you cannot just assume that a bottom has been put in place or that the market will automatically roll over further. What happens when investors and strategists think they see a big correction in a six-year bull market is that those analysts start trimming their price targets. This is nothing new, and should not be a surprise when it happens.

If a traditional analyst upgrade or initiation with a Buy or Outperform rating is 8% to 15% potential upside, then the analyst cannot stick with that previous high target if a stock pulls back 10% or 20%. Many other companies also will be seeing analysts trim their price targets on their stocks.