10 Big Stocks That Have Risen Above and Beyond Fair Value Targets in 2016
The bull market has raged for more than seven years since the bottom in 2009. A frequent saying is that a rising tide market lifts all ships, but there are always exceptions. Sometimes there are stocks that rise above and beyond the overall market as a whole. And in that group, sometimes stocks reach valuations that are hard to justify, even if they are very well-known stocks that happen to be the market darlings of that time.
24/7 Wall St. has identified 10 different stocks that are trading at a share price above what most investors would consider a fair value. The determination of this is not just how the market multiples appear. The Thomson Reuters mean price target is the average price target of every listed analyst covering a stock. This is absolutely not intended to imply that a stock cannot rise further, but it does suggest that the current price is at least above what the average is from a bunch of smart people who understand stocks and the stock market.
Of the 10 companies trading above the consensus estimates, some have simply grown above and beyond what anyone would have ever guessed. Some have risen over 50% and 100% in 2016 (versus 6% to 7% for major indexes). Others may be in defensive sectors, which have higher valuations than normal. And some of these are turnarounds, or they have been chased because of their safe dividend yields during a low-rate or moderate-rate environment.
One thing that investors need to consider here is that analysts sometimes get their views wrong. The analyst community generally has to keep reasonable or moderate upside expectations. The typical upside of a Dow or S&P 500 stock at this time is between 8% and 15%, so a call for a Dow stock to double just would not look normal today.
Another consideration is that most analysts have to lower their price targets on the way down, and they often raise their targets on the way up. When stocks recover they often catapult above many analysts’ price targets. Then there is the other side of the coin on stocks above analyst price targets: sometimes companies outperform but analysts refuse to re-rate stocks up to much higher valuations.
24/7 Wall St. has included some color on each stock with an explanation on why they are above a fair value or consensus analyst price target. This includes trading history, whether there are dividends and how the current price compares to the consensus target.
Advanced Micro Devices Inc. (NASDAQ: AMD) closed most recently at $6.26, and its consensus analyst price target is $5.20. AMD shares have risen about 130% in 2016 and are up almost 250% from a year ago. The excitement around graphics, virtual reality and artificial intelligence and learning has been the driver here. AMD even ran recently above and beyond the more bullish analyst targets. Its smaller market cap and short sellers capitulating have contributed to much of the stock’s gain.
AMD has a 52-week trading range of $1.65 to $7.16 and a market cap of $5 billion. Investors will want to know that AMD pays no dividend, and that is likely to remain that way for years, even if the upside scenario were to come about.
American Water Works
Last seen trading at $82.07, American Water Works Co. Inc. (NYSE: AWK) has a consensus price target of just $77.31. This utility is the king of water in America, so it gets a water premium and a utility premium for safety these days. The company keeps doing well on earnings and is committed to raising dividends. It is not just above the analyst expectations, it has risen above and beyond what 24/7 would have ever assumed when we named it a stock to own for the decade. It is not normal for a water utility to gain 40% in a year, but that’s how much this one is up in 2016.
Shares have a 52-week range of $50.16 to $85.24, and the market cap is $14.6 billion. The dividend yield is 1.7%, which is lower than its historic dividend yield, as well as lower by far than power utilities.
Shares of AT&T Inc. (NYSE: T) were last seen at $43.16, and its consensus price target was $42.27. AT&T is no longer just wireless since acquiring DirecTV. It has plenty of dividend coverage, and the dividend chase has brought in more and more equity buyers. Another boost here may be that the wireless price wars seem to be abating. At 14 times forward earnings, it is not scaring many investors, but the 30% year-to-date gain was more than even the analysts who recently raised their targets could keep up with.
AT&T has a 52-week range of $43.10 and a market cap of $42.27 billion. Its dividend yield is 4.4%.