Should investors be concerned that five of the Dow Jones Industrial Average are trading above their fair value targets? While some investors want to avoid worrying about Wall Street research reports on their individual stocks, the reality is that analyst calls can make a big difference on how investors treat a stock’s longer-term prospects.
It is important to consider this: Do investors want to buy overvalued stocks or stocks that many analysts and investors think have a lot of upside? That is of course a loaded question, but it is worth asking.
It turns out that as of May 24, 2016, there are five Dow stocks that are trading above the consensus analyst price target from Thomson/First Call. Some analysts of course have higher price targets, but when you average out all the targets, the mean price is below the current share price.
There are some common qualities among these potentially overvalued Dow stocks. While some are down handily from former highs, they generally are outperforming the broader market so far in 2016.
Some of these potentially overvalued Dow stocks have seen their shares get battered from their former glory days, or they have real business challenges right now. They generally are suffering from a contraction in earnings, and they are either suffering from ongoing slow growth or outright negative trends in revenues.
Here are five Dow stocks trading above their consensus fair value estimates tracked on Wall Street. 24/7 Wall St. has included the other side of the coin with more positive targets and ratings or additional color and trading history has been added for relevance.
International Business Machines Corp. (NYSE: IBM) has engineered earnings per share numbers for many years, and now its earnings and revenue trends are not favorable. The company just cannot get its Watson and other new initiatives to grow fast enough to offset the bleeding in its core IT-services business. Even Warren Buffett as the largest holder hasn’t swayed the public, and IBM is no longer so focused on demonstrating its backlog or orders.
IBM is worth some $141 billion now. Shares trade at $148.24 and its consensus analyst price target is $144.01. Still, the stock was up almost 8% and ranked as the seventh best-performing Dow stock so far in 2016. Its 52-week range is $116.90 to $173.78, and its highest analyst price target remains up at $168, but this was much higher two and three years ago. Wells Fargo recently light talked up its restructuring and the most negative analyst target remains quite firmly against the company. IBM’s dividend yield is close to 3.8%.
If you only followed Caterpillar Inc. (NYSE: CAT) sales trends, you might think it was heading to deeper and deeper problems. Investors actually have driven shares up 6% so far in 2016, on hopes that the woes in China, Brazil, Russia and other growth markets finally might at least see a light at the end of the tunnel. Still, Caterpillar is valued at almost 20 times forward earnings, and its market cap is $41 billion.