Analysts on the sell side research desk at investment bank UBS have reportedly slapped a $24.30 target on Pro Medicus Limited (ASX: PME) shares and going Goldman Sach's and Brisbane-based broker Morgans in taking a generally positive view on the business.
Goldman's has a $24 price target on Pro Medicus and is a fan of the business but not its valuation that currently sits close to 10% above that target with shares at $26 today. Likewise, UBS and Morgans rate the medical imaging provider, but not so much at today's prices given their respective valuations of $24.30 and $23.79 respectively.
Aside from the increased broker coverage the other factor probably sending the share price to record highs is that Pro Medicus today joined the core S&P/ ASX200 (ASX: XJO) Index of Australia's leading companies alongside the likes of Austal Limited (ASX: ASB), Service Stream Limited (ASX: SSM) and Clinuvel Pharmaceuticals Limited (ASX: CUV).
The S&P/ ASX 200 is probably the most heavily tracked index by passive investment funds that are rising in popularity and investable funds. As such when a relatively illiquid small cap stock like Pro Medicus joins it can end up inflated in valuation as the funds must buy the stock up to its weighting in the S&P/ ASX200 in order to track the index for investors.
Given Pro Medicus's growing fan club then we can see why the valuation may get a little distorted when sentiment is strong.
