Absolute Software Corporation (ABST) closed its latest trading session at $12.06, a 30.4% gain over the past four weeks, but there could still be plenty of upside in the stock if Wall Street analysts’ short-term price targets are any guideline. The average price target of $15.14 indicates upside potential of 25.5%.
The mean consists of four short-term targets ranging from a low of $11.55 to a high of $17, with a standard deviation of $2.44. While the lowest estimate points to a 4.2% decline from current price levels, the most optimistic estimate points to a 41% increase. More than the range, one should note the standard deviation here as it helps to understand the variability of the estimates. The smaller the standard deviation, the greater the agreement between analysts.
While investors are highly sought after by the consensus price target, the ability and unbiasedness of analysts in setting price targets has long been questionable. And investors making investment decisions based solely on this tool would arguably be doing themselves a disservice.
However, an impressive consensus price target isn’t the only factor that points to potential upside in ABST. This view is bolstered by analysts’ agreement that the company will report better earnings than they previously estimated. While a positive trend in earnings estimate revisions doesn’t give an idea of how much the stock could rise, it has proven effective in predicting an uptrend.
Here’s what you need to know about analysts’ price targets
According to researchers at several universities around the world, a price target is one of many pieces of information about a stock that misleads investors far more often than it indicates. In fact, empirical research shows that price targets set by various analysts, regardless of the degree of agreement, rarely indicate where a stock’s price might actually go.
While Wall Street analysts have a deep understanding of a company’s fundamentals and its sensitivity to economic and industrial problems, many of them tend to set overly optimistic price targets. Are you wondering why?
They usually do so to generate interest in shares of companies with which their company has existing business relationships or with which they wish to be associated. In other words, business incentives from companies that hedge a stock often result in overpriced price targets set by analysts.
However, a tight clustering of price targets, represented by a low standard deviation, indicates that analysts have a high degree of agreement about the direction and magnitude of a stock’s price movement. While that doesn’t necessarily mean the stock will hit its average price target, it could be a good starting point for further research aimed at identifying the potential fundamental drivers.
That said, while investors shouldn’t completely ignore price targets, making an investment decision based solely on them can lead to a disappointing ROI. So price targets should always be treated with a high degree of skepticism.
Why ABST could see a solid advantage?
There has been growing optimism among analysts about the company’s earnings outlook lately, as evidenced by strong agreement among them on revising EPS estimates upwards. And that could be a legitimate reason to expect a rise in the stock. Indeed, empirical research shows a strong correlation between trends in earnings estimate revisions and short-term price movements.
In the past 30 days, the Zacks Consensus Estimate for the current year is up 487.5% as one estimate has moved higher compared to no negative revision.
In addition, ABST currently has a Zacks Rank #1 (Strong Buy), meaning it is in the top 5% of more than the 4,000 stocks we rank based on four factors related to earnings estimates. Given the impressive track record of external audits, this is a more conclusive indication of the stock’s near-term upside potential. You can view the full list of current Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, while the consensus price target may not be a reliable indicator of how much ABST could gain, the direction of price movement it implies seems to be a good guide.
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