$600 or $2000 for a share of Google? Price targets seem to have become popular again, but not at Hedgefolios. The only targets I find interesting are ones that are below the current market price. The last time targets were as much in the news as they have been lately things didn’t turn out so well. I remember targets like $1000 for Qualcomm, $600 for Yahoo and who can forget Blodget’s call of $400 for Amazon? Just pull up the last quotes for each and you have to wonder why investors bought into the concept last time and more importantly, why are they buying into them again? People have an amazing ability to put unquestioning faith into a number just because it’s written down. That’s just the way it is.

Theoretically, there is merit to price targets because they should be based upon quantitative measures. Just take your best estimate of future earnings per share multiply that by a PE ratio and out comes a price target. For value investors that like to create intrinsic value measures to help with stock selection, this is a familiar process. Unfortunately, the reality is that most price targets are more about marketing calls than they are about portfolio management. However, even if they are based upon math, targets provide no long term benefits to increasing the value of your portfolio. You may use targets and your portfolio may go up, but I question any correlation between the two.

One thing that bugs me about targets is that they usually have the phrases “long term” or “12 month” attached to them. Yet, in reality, the main effects of publishing targets are found in the very short term - like the day of the announcement and maybe the day following if it is surreal enough to get others to comment on it or offer competing numbers. To me, predicting stock prices 12 months in the future sounds like predicting the weather 12 months from now. There’s a small chance you will get it right, but that doesn’t mean your analysis had anything to do with it. You can predict things like that for tomorrow or next week or maybe get close for a month, but that’s where the believability of relying on data to predict the future trails off. As it relates to individual stocks, there is too much that can happen over any extended period. In general, 12 month targets rely heavily upon an assessment of what market sentiment will be to create the relevant PE at that time. In the words of Secretary Rumsfeld - that is just “unknowable.”

Calculating the performance of a price target forecast is almost impossible as they rarely achieve the current published figure. It seems that each time a stock approaches, the target is moved. This moving target phenomenon should give you reason to ponder how you can use them either for selection or portfolio management. Some advisors suggest that you should sell a stock when it hits or exceeds the price target you established when entering the position - others suggest moving the target. If you don’t rely on targets in the first place, you won’t have to follow either suggestion.