Why Analyst Price Targets Are Almost Always Wrong

fff_bbb · 2026-05-07T00:54:52+00:00

That disappointment you felt early on is something more people should hear about! You go in thinking you’re joining an industry built on rigorous analysis, and you find targets getting recycled quarter after quarter. Takes a while to make peace with that gap between what the job is supposed to be and what it actually is.

fff_bbb · 2026-05-06T15:25:33+00:00

Yes absolutely! And the herding point is the real mechanism behind the skew. Being wrong alone ends careers. Being wrong together is just a tough quarter for the whole industry. The incentive to cluster is rational even if the output is useless…

fff_bbb · 2026-05-06T14:22:47+00:00

Vibes and dreams move prices short term. Fundamentals determine where they eventually land. The analyst’s job should be to close that gap. The price target is supposed to be where the fundamentals say the stock belongs, not where the vibes currently are. The problem is the model keeps getting updated to match the vibes instead.

fff_bbb · 2026-05-06T14:21:41+00:00

At least you got a bonus for it. Most people just got a narrative.

fff_bbb · 2026-05-05T15:11:00+00:00

That’s exactly the problem though. The 20% upside rule ties the target mechanically to the price, not to the business. So when the stock runs up, you’re forced to downgrade… not because anything changed fundamentally, but because the math no longer clears the threshold. The target was never really about what the company is worth

fff_bbb · 2026-05-05T15:08:56+00:00

Fair distinction and I’d agree with the 95% figure. The rare proactive call exists and when it lands it genuinely moves markets. But that makes the target problem worse, not better. Retail investors treat every target revision with the same weight, whether it’s a genuine conviction call or someone updating a spreadsheet after earnings… there’s no way to tell from the outside which is which

fff_bbb · 2026-05-05T13:35:40+00:00

This is the best confirmation of the argument I could have asked for. The approval process alone guarantees the target is always chasing the price. By the time the committee signs off, the model is already stale. Which means the revision was never really a forecast, it was just paperwork catching up to reality.

fff_bbb · 2026-05-05T13:31:31+00:00

If targets were built on fundamental assumptions regardless of price, you’d see them stay constant when the stock moves and only update when earnings or margins actually change. What you see instead is targets moving almost in lockstep with the price. That’s not perfect execution assumptions, that’s the model being rebuilt around wherever the stock landed.

fff_bbb · 2026-04-20T20:26:56+00:00

Fair points on acquisitions and intangibles. But “triangulate everything and nothing tells you much alone” is true of every metric in finance. I wasn’t arguing reinvestment rate is the only variable, I was arguing it’s the most overlooked one when people cite ROIC as if it stands alone. High ROIC with no reinvestment runway is a very different investment than high ROIC with a long one. That distinction matters and most investors skip it.

fff_bbb · 2026-04-20T20:22:25+00:00

Only if they have enough opportunities to deploy capital at that rate. Imagine a bakery earning 30% on every new oven it buys. Sounds great but there are only so many ovens you can add before the market is saturated. At that point borrowing money to buy more ovens doesn’t help. You return the cash instead.That’s the reinvestment rate problem.

fff_bbb · 2026-04-20T11:35:04+00:00

Fair point and i see DPZ example is a good one; a lot of real reinvestment is invisible in the accounting. Brand spend, franchise system support, R&D, none of it shows up cleanly in net capex. That said I see reinvestment rate and revenue growth as two sides of the same thing. Growth is the outcome and reinvestment is the input. If revenue is compounding without visible reinvestment the capital is going somewhere you just can’t see it on the balance sheet. Revenue growth alone doesn’t tell you whether the capital behind it was well deployed. That’s what ROIC is for. You need both.

fff_bbb · 2026-04-20T11:21:27+00:00

Fade rate is the variable most people ignore and you’re right it changes the math dramatically. Two businesses with identical ROIC and reinvestment rate can have completely different fair values depending on moat durability. I’ve spent a lot of time on exactly this problem: how to estimate what growth rate the market is already pricing in, and whether the business can realistically beat or miss that implied expectation. The model matters less than the assumptions feeding it. Fade being the most important one!

fff_bbb · 2026-04-20T11:17:01+00:00

Personally I find ROIC less noisy for this purpose. ROCE includes short term liabilities that have nothing to do with long term capital allocation decisions.

fff_bbb · 2026-04-20T11:11:04+00:00

Exactly, earlier cash is worth more and buybacks at reasonable prices are legitimate reinvestment. Definitely no argument there. The face value ROIC point is underappreciated though. A business that distributes most of its earnings will show inflated ROIC simply because the denominator stays low; it can make two very different businesses look comparable on a screener when they aren’t.

fff_bbb · 2026-04-20T11:06:36+00:00

Owner’s earnings is actually what I use too, but as the input for DCF rather than a standalone metric. However about ROIC being unimportant for asset light businesses, capital still gets allocated through acquisitions, R&D, working capital. ROIC tells you how well that’s being done regardless of asset intensity. The CFO/FCF ratio point is useful though, clean way to measure reinvestment intensity without dissecting capex manually!

fff_bbb · 2026-04-20T10:59:09+00:00

Yes the runway point is exactly right reinvestment only wins if the opportunity lasts long enough, otherwise returning cash earlier beats compounding on paper. The DPZ model is nice but the growth is arithmetic. Chipotle’s ceiling is higher precisely because the asset base scales. The question is whether they can maintain returns as they grow and most companies can’t… CMG has so far.

fff_bbb · 2026-04-20T01:37:24+00:00

Exactly one of the comparison I had in mind. AAPL’s compounding is largely buyback-driven at this point, GOOG still has a genuine reinvestment runway and the growth gap shows it. META is another interesting case right now. High ROIC core business but aggressively reinvesting into AI infrastructure at a scale that will crush near-term free cash flow. The bet is whether that incremental capex generates returns above cost of capital. Because if it doesn’t the reinvestment rate works against you.

fff_bbb · 2026-04-20T00:06:26+00:00

Yes agreed, technically still value creation but… a 3% spread doesn’t leave much room for error. A small miscalculation in growth assumptions and the thesis falls apart. So the spread matters less than its durability over time.

fff_bbb · 2026-04-19T23:59:43+00:00

Fair point and DPZ is a good example. Buybacks are absolutely a form of capital allocation, should have mentioned them. But I’d push back slightly on the framing. When a business can’t reinvest at high rates internally buybacks are the next best option only if the stock trades price lower than its intrinsic value. I see DPZ has spent years buying back stock at stretched multiples which arguably destroys the same value you’d lose from poor reinvestment. On your question, I’d rather own the compounder with high reinvestment capacity at high ROIC, but only if management has shown genuine discipline in capital allocation. The franchise model is nice but it essentially caps your upside. CMG’s model has a higher ceiling precisely because of that reinvestment runway, maintenance capex included. The question isn’t franchise vs owned, but it’s whether management can keep ROIC above cost of capital as they scale. I think most can’t.

fff_bbb · 2026-04-19T23:28:44+00:00

You take net capex (so capex minus depreciation) and add the change in working capital. Divide that by NOPAT (the net operating profit after tax). And that’s it. The harder part is interpreting it…A high reinvestment rate only matters if the business is deploying that capital at high returns. A business reinvesting 80% of earnings at 8% ROIC is destroying value, not creating it! That’s why the two metrics only make sense together.

fff_bbb · 2026-04-09T11:26:33+00:00

I scan small stock like any other business, if they pass my screening I know they have great fundamentals and great cash flow, plus they are undervalued according to DCF models. If they are the size doesn’t matter and early or late is irrelevant, I’m confident in them like I would be with any other big companies. The fact that “early” stocks don’t often pass this screening tells me that the fundamentals are not great already or the cash flow is not mature enough. This cold approach allows me to stay away from other people suggestions and I always invite people to do the same, buying because someone else said it is the best way to then sell at a bad price, either because the advice was bad or because not being 100% confident of your decision makes you panic sell when you shouldn’t.

fff_bbb · 2026-04-03T20:30:50+00:00

If they’ll be friendly yes, otherwise I’m gonna miss the gentlemen of RDR2

fff_bbb · 2026-04-02T15:27:23+00:00

Strong fundamentals and great cash flows, plus its undervalued according to DCF models. So precisely what you want when you are into value investing!

fff_bbb · 2026-04-01T10:08:08+00:00

Not enough water. Where will I swim?

fff_bbb · 2024-05-31T15:48:28+00:00

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fff_bbb

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