Should you trust the experts?

I have received a few questions (which are always welcome – see my contact page) regarding the “expert” opinions that are offered on a stock. These experts suggest some information on the particular stock but many people struggle to understand the accuracy of this advice.

First, please understand that there are really smart people out there that do analysis on companies. These really smart people are constantly thinking about how to increase wealth for their clients. Also, understand that not all of these really smart people are on TV – most of them are locked in an office making really big money for very large portfolios. The biggest paycheck for these analysts is not on TV so don’t assume the best and brightest are looking at you via a camera.

Even the guys in the back rooms can be questioned regarding the logic of their suggestions.

For this conversation, lets just look at Target (TGT) [stckqut]TGT[/stckqut] and the information that is compiled by MSN Money (one of the best free financial portal sites). Go there in another window of your browser and type ‘TGT’ into the stock ticker search box (if you click on this link, I will do this for you). About halfway down the left side of that site you will see Earnings Estimates and on the resulting page you will see 4 tabs, with the 4th tab being Earnings Growth Rates (or just click on this link and go right there). As of this writing, you will see that for the last 5 years Target grew at 7.7%, the industry grew at 11.3%, and the S&P 500 grew at 3%. You will also see that the analysts are suggesting that in the next 5 years, Target will increase it’s earnings 12.4%, which is 61% higher than what it did the previous 5 years and nearly 10% better than the industry did in the previous 5 years.

The experts are also predicting that retailers in general are going to increase their growth in the next 5 years over the growth they experienced the last 5. That may be a bit logical if you assume that the economy is going to get better vs. the challenges of the immediate past. But, can you assume that Target’s share of that growth will increase as compared to its competitors, since that is the result of them achieving 12.4% growth.

If they can pull that AMAZING turnaround off, that is great. But, can you be confident that Target is going to do that much better than it was doing historically? I know that I can’t; therefore, I rarely give too much credence to what the “experts” are saying about a company’s growth prospects.

Please understand that there are a lot of good people that try to come up with these numbers, but let’s think about how they are doing it. They are going to trade shows, visiting with the company in question, and the company’s competitors. Everyone at these meetings has a significant vested interest to paint a rosy picture about the future.  They may not be wrong, but I doubt you can be confident that they are correct. As I state by the title of this site, I am a confident investor – I only do things that I am reasonably confident will play out in my favor.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.