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Sonic Automotive (SAH) closed the last trading session at $54.21, gaining 8.5% over the past four weeks, but there could be plenty of upside left in the stock if short-term price targets set by Wall Street analysts are any guide. The mean price target of $68.57 indicates a 26.5% upside potential.
The average comprises seven short-term price targets ranging from a low of $55 to a high of $85, with a standard deviation of $11.50. While the lowest estimate indicates an increase of 1.5% from the current price level, the most optimistic estimate points to a 56.8% upside. More than the range, one should note the standard deviation here, as it helps understand the variability of the estimates. The smaller the standard deviation, the greater the agreement among analysts.
While the consensus price target is a much-coveted metric for investors, solely banking on this metric to make an investment decision may not be wise at all. That's because the ability and unbiasedness of analysts in setting price targets have long been questionable.
However, an impressive consensus price target is not the only factor that indicates a potential upside in SAH. This view is strengthened by the agreement among analysts that the company will report better earnings than what they estimated earlier. Though a positive trend in earnings estimate revisions doesn't give any idea as to how much the stock could surge, it has proven effective in predicting an upside.
Price, Consensus and EPS Surprise
Here's What You Should Know About Analysts' Price Targets
According to researchers at several universities across the globe, a price target is one of many pieces of information about a stock that misleads investors far more often than it guides. In fact, empirical research shows that price targets set by several analysts, irrespective of the extent of agreement, rarely indicate where the price of a stock could actually be heading.
While Wall Street analysts have deep knowledge of a company's fundamentals and the sensitivity of its business to economic and industry issues, many of them tend to set overly optimistic price targets. Are you wondering why?
They usually do that to drum up interest in shares of companies that their firms either have existing business relationships with or are looking to be associated with. In other words, business incentives of firms covering a stock often result in inflated price targets set by analysts.
However, a tight clustering of price targets, which is represented by a low standard deviation, indicates that analysts have a high degree of agreement about the direction and magnitude of a stock's price movement. While that doesn't necessarily mean the stock will hit the average price target, it could be a good starting point for further research aimed at identifying the potential fundamental driving forces.
That said, while investors should not entirely ignore price targets, making an investment decision solely based on them could lead to disappointing ROI. So, price targets should always be treated with a high degree of skepticism.
Why SAH Could Witness a Solid Upside
There has been increasing optimism among analysts lately about the company's earnings prospects, as indicated by strong agreement among them in revising EPS estimates higher. And that could be a legitimate reason to expect an upside in the stock. After all, empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
The Zacks Consensus Estimate for the current year has increased 6.8% over the past month, as two estimates have gone higher compared to no negative revision.
Moreover, SAH currently has a Zacks Rank #1 (Strong Buy), which means it is in the top 5% of more than the 4,000 stocks that we rank based on four factors related to earnings estimates. Given an impressive externally-audited track record, this is a more conclusive indication of the stock's potential upside in the near term. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, while the consensus price target may not be a reliable indicator of how much SAH could gain, the direction of price movement it implies does appear to be a good guide.
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