Price Target & Recommendations

Everyone should know that price targets are the result of an evaluation that requires as much science as art. Assumptions are often hard to estimate and have a great impact on price targets. I use this information as a reference, so I like to have a big margin of upside. This is what I like to see when analyzing this information:

  • There are at least 3 analysts covering the stock;
  • None of the analysts covering the stock recommends selling and the majority recommends buying;
  • Recommendations should be updated (max 5/6 months old);
  • The lowest price target represents at least 25% upside potential.

Of course some of these conditions are more important than others but this is my ideal scenario. Let’s see how they fit into DTLK’s stock:

There are 8 analysts covering the company and none recommends selling and only 1 of them recommends holding. First two conditions are met perfectly.

As we can see, not all recommendations are updated, but most of them are and that’s enough for me as there are still 7 recommendations very updated.

Two things to notice here:

  1. I have 8 analysts but only 6 PT’s. One of the missing is from EVA Dimensions which has the HOLD rating and the other is from Sidati & Co which has the oldest recommendation;

  2. The lowest PT is from Craig Hallum ($11) which represent about 30% upside potential compared to the most recent share price ($8.43 @ 14/09/2012)

As we see, there are some exceptions to that perfect scenario but I think it’s a good one though.

Another important analysis is the understanding of how share price is influenced by recommendations, upgrades/downgrades and price targets. This is part of the information incorporated in share price (see Price Info).

Two important things here:

  1. It seems that price is pulling price target and not the other way around. Notice that every time price comes close to price target, the latest increases. But this can also be related to the fact that the PT in the graph is reported monthly;

  2. The gap between PT and Price is usually smaller than the one recently formed, which gives a huge opportunity in terms of upside potential. Historically the gap tends to narrow despite volatility.

  3. The last change in PT was the first drop in more than a year. Still it’s higher than 6 months ago and price is lower than at that time.