Wall Street analysts aren't known for their boldness. They tend
to analyze and value companies on the basis of what lies ahead in
the next month or quarter, refusing to predict where a company --
and its stock -- may be headed in a year or two. Though they stick
a "buy" rating on most stocks they cover, their target prices are
often only modestly above the current price, as they seeshares
through the prism of this short-term myopic view. There's not a lot
of upside if there are only a few weeks or months to reach
theirprice target .
That's why I stand up and take note when price targets are far
above or far below the current stock price. These are usually
issued by analysts that tend to look further down the road -- to
where a company'sprofit picture and business trends will be a year
or two from now. And this is the kind of longer-term view I believe
investors should have if they don't want to miss out on making
quick gains that might only be disguised by short-term hiccups.
Here's a look at three stocks with price targets handily above
1. Rite Aid (NYSE:
Current price: $1.18
Guggenheim price target: $2
This debt-laden drug store chain sprang to life this past
winter, as shares surged from under $1 in October 2011 to above $2
by March 2012.Buyout rumors led to a massiveshort squeeze , but as
a buyer failed to emerge, shares quickly gave up almost all of
those gains during the following months. Short sellers haven't been
deterred: They still hold 41 million shares short.
Yet if analysts at Guggenheim are correct, then we may be
looking at another short squeeze. They say a comingwave of generic
drug launches, which will reach a crescendo in the first half of
2013, could drive a lot of traffic to Rite-Aid. Generic drugs cut
both ways: Their lower prices can cause a drop in revenue at the
drugstore counter, but act as a lure for higher store traffic, so
consumers end up buying more non-drug items.
This trend was in evidence for Rite-Aid in September, according to
company data, but on balance, should be a benefit for thebottom
line . These Guggenheim analysts say Rite-Aid's third-quarterEBITDA
will likely rise 12% from a year ago to $247 million, higher than
most analysts are anticipating.
If Guggenheim analysts are right and we see a big short squeeze
that moves the stock quickly higher, then you're best off locking
in gains, as Rite-Aid's debt is still troublesome.
2. Sirius XM Radio (Nasdaq:
Current price: $2.67
Merrill Lynch target: $3.75
This satellite radio provider has risen more than 100% during
the past two years -- and still has ample upside according to
Merrill Lynch, which picked up coverage of the stock on Oct. 2.
Analysts see a stock which has made heavy investments in past years
and should now start to reap the rewards. From here through 2016,
EBITDA is expected to rise at a 20% annual pace, whilefree cash
flow should rise 35% annually, according to these analysts.
Part of the growth thesis is based on a continuing rise in North
American auto sales, which are now up 50% from post-recession lows
but still 20% below pre-recession peaks. Many new cars come with
Sirius radio as anoption .
Sirius is already used in 13% of all U.S. households, making it
the nation's second-largest entertainment subscription service,
. Analysts at Merrill Lynch say SiriusXM can double its user base
before fully reaching maturity. My main concern: Will future cars
also use land-based wireless Web-streaming services for radio,
providing consumers with a lower-cost choice than Sirius XM?
3. First Solar (Nasdaq:
Current price: $20.26
Lazard target price: $50
A few weeks ago, my colleague Melvin Pasternak
looked at the technical set-up
for this solar-panel provider and concluded that a move past $24
would break resistance, opening the door for a quick move to $30 --
the fundamental view as seen by Merrill Lynch, and noted a $30
According to analysts at Lazard, $30 doesn't cut it. They say
First Solar is positioned to land a string of high-profile
international contracts in places such as Japan and Australia,
setting the stage for annualearnings per share (
) in the $3 to $4 rage for a number of years to come. Earlier this
week, First Solar secured an agreement in India to build a
50-megawatt power plant. India has huge energy supply problems that
are constraining economic growth, so the government has signaled
plans to make a large bet on solar power in coming years.
Risks to Consider:
These targets assume a flat or rising stockmarket . If the
market gets hit by profit-taking, then these stocks have little
Action to Take -->
These lofty price targets are based on long-term trends, so don't
be discouraged if the stocks fail to gain quick traction. That
said, it may also be unwise to simply hold these stocks until the
price targets have been attained. Instead, look to lock in gains --
especially if they show quick upward moves. These kinds of lofty
price targets, even when met, often entail a bumpy road up and down
to get there.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.