The financial media loves to get predictions from experts about where they think the S&P 500 index is headed. Some experts look at technical analysis patterns, others look at valuation metrics, others apply a broad macro view of the economy. In this article, we present another forecasting approach that investors may find interesting. The S&P 500 is really a collection of five hundred individual stocks, each with specified weighting applied towards the total. For each of those individual stocks, all of the major brokerage houses out there ask their best analysts to thoroughly study the company and then come up with a 12-month price target. Taking all of the different price targets from all of the major analysts, we can then compute an average target for that stock. In a sense this average target represents a “wisdom of crowds” effort, because so many individual minds contributed to the ultimate number, as opposed to what just one particular expert believes.
But we can take it a step further, comparing the current stock price against that average analyst target, to calculate how much upside exists if the average target price is reached, and we can do that same exercise for each and every component. Here at ETF Channel, we have done this exercise for all of the individual components of the SPDR— S&P 500— ETF Trust ETF (Symbol: SPY), and then weighted the results together to determine the implied average analyst target for the ETF itself. For the SPDR— S&P 500— ETF Trust ETF, we found that the implied analyst target price for the ETF based upon its underlying holdings is $514.05 per unit.
With SPY trading at a recent price near $468.62 per unit, that means that analysts see 9.70% upside for this ETF looking through to the average analyst targets of the underlying holdings. Three of SPY’s underlying holdings with notable upside to their analyst target prices are HCA Healthcare Inc (Symbol: HCA), Johnson & Johnson (Symbol: JNJ), and (Symbol: CBOE). Although HCA has traded at a recent price of $258.97/share, the average analyst target is 11.23% higher at $288.06/share. Similarly, JNJ has 10.65% upside from the recent share price of $172.22 if the average analyst target price of $190.56/share is reached, and analysts on average are expecting CBOE to reach a target price of $137.50/share, which is 10.60% above the recent price of $124.32. Below is a twelve month price history chart comparing the stock performance of HCA, JNJ, and CBOE:
Below is a summary table of the current analyst target prices discussed above:
|Name||Symbol||Recent Price||Avg. Analyst 12-Mo. Target||% Upside to Target|
|SPDR— S&P 500— ETF Trust ETF||SPY||$468.62||$514.05||9.70%|
|HCA Healthcare Inc||HCA||$258.97||$288.06||11.23%|
|Johnson & Johnson||JNJ||$172.22||$190.56||10.65%|
Are analysts justified in these targets, or overly optimistic about where these stocks will be trading 12 months from now? Do the analysts have a valid justification for their targets, or are they behind the curve on recent company and industry developments? A high price target relative to a stock’s trading price can reflect optimism about the future, but can also be a precursor to target price downgrades if the targets were a relic of the past. These are questions that require further investor research.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.