Following stellar results from investment bank Macquarie Group Ltd (ASX: MQG) last week many analysts have proceeded to raise their 'price targets' on its stock.
Firstly, it should be known, price targets are no substitute for your own thorough independent company research.
Nevertheless, according to Dow Jones Newswires, analysts at Citi, Deutsche Bank and JPMorgan have raised their price targets on Macquarie Group shares to $76.00, $79.00 and $81.00, respectively.
After jumping as much as 5% in the wake of the better-than-expected results, Macquarie Group shares now change hands at $79.52.
According to The Wall Street Journal, of the 14 analysts currently following Macquarie Group, seven analysts have 'Buy' ratings on the stock with the average price target set at $84.01. Notably, this is well above its current market price.
Personally, I think placing 12-month price targets on a stock is as good as guesswork. Of course, price targets are just an estimation of the intrinsic value of the shares based on forward estimates.
But there are so many unknowns which may or may not affect intrinsic valuations.
Thus, the most important thing a long-term investor can do when picking their stocks is focus first and foremost on the underlying business, its growth strategy, financials and the management team. Then, only after all that has been completed, valuation can be undertaken.
Given the 5% difference between the market price and price targets, consensus among analysts is to be "overweight" on Macquarie Group shares. This means having a greater portion of Macquarie Group shares in your portfolio than would otherwise be the case, in an attempt to improve the returns.
Should you Buy, Hold or Sell?
Personally, I'm not buying Macquarie shares at today's prices. Perhaps that's why I find it particularly concerning that not one analyst has an "underweight" (the opposite of overweight) or a "sell" rating on the stock.
Whilst I believe Macquarie is a great company, according to its management team, a large portion (over 31%) of the group's profits come from capital markets facing businesses. This means, almost a third of profits could be considered cyclical in nature. As equity markets rise and fall, a large portion of Macquarie Group's profits could be expected to follow suit.
It should go without saying therefore that long-term investors ought to buy the stock when the capital markets businesses are not performing as well as they could be. Right now U.S. stock markets and the local S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) are sitting above their long-term average valuations and all of Macquarie Group's divisions are kicking goals.
By way of example in 2007 Macquarie Group shares were trading at over $100 on earnings per share of $5.60. After declaring earnings per share of $6.42 in 2008, Macquarie's share price promptly fell to below $18.00 by February 2009. That year, it reported earnings per share of $3.03. Earnings subsequently fell every year until 2012 as equity capital markets sunk and experienced unprecedented volatility.
Is it a 'Sell'?
When I buy stocks, I aim to buy them at a price 30% below what I think they're worth.
Therefore I'd have to believe Macquarie Group shares are worth at least $103 to justify a buy rating today. Unfortunately I don't believe they are worth that much.
At best I believe Macquarie Group is a 'Hold'. However if I held shares from a much lower price, I'd look to take at least some profits off the table and start searching for cheaper stocks to buy today.
