Wall Street analysts aren't known for their boldness. They tend to analyze and value companies on the basis of what lies ahead in the next month or quarter, refusing to predict where a company -- and its stock -- may be headed in a year or two. Though they stick a "buy" rating on most stocks they cover, their target prices are often only modestly above the current price, as they see shares through the prism of this short-term myopic view. There's not a lot of upside if there are only a few weeks or months to reach their price target.
That's why I stand up and take note when price targets are far above or far below the current stock price. These are usually issued by analysts that tend to look further down the road -- to where a company's profit picture and business trends will be a year or two from now. And this is the kind of longer-term view I believe investors should have if they don't want to miss out on making quick gains that might only be disguised by short-term hiccups.
Here's a look at three stocks with price targets handily above current levels:
1. Rite Aid (NYSE: RAD)
Current price: $1.18
Guggenheim price target: $2
This debt-laden drug store chain sprang to life this past winter, as shares surged from under $1 in October 2011 to above $2 by March 2012. Buyout rumors led to a massive short squeeze, but as a buyer failed to emerge, shares quickly gave up almost all of those gains during the following months. Short sellers haven't been deterred: They still hold 41 million shares short.
Yet if analysts at Guggenheim are correct, then we may be looking at another short squeeze. They say a coming wave of generic drug launches, which will reach a crescendo in the first half of 2013, could drive a lot of traffic to Rite-Aid. Generic drugs cut both ways: Their lower prices can cause a drop in revenue at the drugstore counter, but act as a lure for higher store traffic, so consumers end up buying more non-drug items.
This trend was in evidence for Rite-Aid in September, according to company data, but on balance, should be a benefit for the bottom line. These Guggenheim analysts say Rite-Aid's third-quarter EBITDA will likely rise 12% from a year ago to $247 million, higher than most analysts are anticipating.
If Guggenheim analysts are right and we see a big short squeeze that moves the stock quickly higher, then you're best off locking in gains, as Rite-Aid's debt is still troublesome.
2. Sirius XM Radio (Nasdaq: SIRI)
Current price: $2.67
Merrill Lynch target: $3.75
This satellite radio provider has risen more than 100% during the past two years -- and still has ample upside according to Merrill Lynch, which picked up coverage of the stock on Oct. 2. Analysts see a stock which has made heavy investments in past years and should now start to reap the rewards. From here through 2016, EBITDA is expected to rise at a 20% annual pace, while free cash flow should rise 35% annually, according to these analysts.
Part of the growth thesis is based on a continuing rise in North American auto sales, which are now up 50% from post-recession lows but still 20% below pre-recession peaks. Many new cars come with Sirius radio as an option.
Sirius is already used in 13% of all U.S. households, making it the nation's second-largest entertainment subscription service, behind Netflix (Nasdaq: NFLX). Analysts at Merrill Lynch say SiriusXM can double its user base before fully reaching maturity. My main concern: Will future cars also use land-based wireless Web-streaming services for radio, providing consumers with a lower-cost choice than Sirius XM?
3. First Solar (Nasdaq: FSLR)
Current price: $20.26
Lazard target price: $50
A few weeks ago, my colleague Melvin Pasternak looked at the technical set-up for this solar-panel provider and concluded that a move past $24 would break resistance, opening the door for a quick move to $30 -- or more.
I offered the fundamental view as seen by Merrill Lynch, and noted a $30 price target.
According to analysts at Lazard, $30 doesn't cut it. They say First Solar is positioned to land a string of high-profile international contracts in places such as Japan and Australia, setting the stage for annual earnings per share (EPS) in the $3 to $4 rage for a number of years to come. Earlier this week, First Solar secured an agreement in India to build a 50-megawatt power plant. India has huge energy supply problems that are constraining economic growth, so the government has signaled plans to make a large bet on solar power in coming years.
Risks to Consider: These targets assume a flat or rising stock market. If the market gets hit by profit-taking, then these stocks have little downside support.
Action to Take --> These lofty price targets are based on long-term trends, so don't be discouraged if the stocks fail to gain quick traction. That said, it may also be unwise to simply hold these stocks until the price targets have been attained. Instead, look to lock in gains -- especially if they show quick upward moves. These kinds of lofty price targets, even when met, often entail a bumpy road up and down to get there.