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Here’s what you need to know

Here’s what you need to know

Actions of Inspired Entertainment (INSE) have gained 7.2% over the past four weeks to close the latest trading session at $13.80, but there could still be solid upside potential for the stock if targets are to be believed short-term price forecasts from Wall Street analysts. Based on price targets, the average estimate of $20.75 indicates 50.4% upside potential.

The average includes four short-term price targets ranging from a low of $18 to a high of $27, with a standard deviation of $4.27. While the lowest estimate indicates a 30.4% increase from the current price level, the most optimistic estimate indicates a 95.7% increase. More than the range, it is appropriate to note the standard deviation here, because it allows us to understand the variability of the estimates. The smaller the standard deviation, the greater the agreement between analysts.

Although the consensus price target is highly sought after by investors, the ability and impartiality of analysts to set price targets has long been questionable. And investors who make investment decisions based solely on this tool may be doing themselves a disservice.

But for INSE, an impressive average price target is not the only indicator of upside potential. A strong consensus among analysts on the company’s ability to report earnings above what they previously forecast reinforces this view. While a positive trend in earnings estimate revisions is no guide to a stock’s potential upside, it has been proven to be an effective predictor of upside.

Price, consensus and EPS surprise

Zacks Price Chart, Consensus and EPS Surprise for INSEZacks Price Chart, Consensus and EPS Surprise for INSE

Zacks Price Chart, Consensus and EPS Surprise for INSE

Here’s What You May Not Know About Analyst Price Targets

A price target is one of many pieces of information about a stock that misleads investors far more often than it guides them, according to researchers at several universities around the world. In fact, empirical research shows that price targets set by multiple analysts, regardless of the degree of agreement, rarely indicate where a stock’s price might actually be heading.

Even though Wall Street analysts have in-depth 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. You wonder why ?

They typically do this to generate interest in the stocks of companies with which their companies have business relationships or seek to partner. In other words, the trading incentives of companies that cover a stock often result in inflated price targets set by analysts.

However, a tight grouping of price targets, represented by a low standard deviation, indicates that analysts largely agree on the direction and magnitude of a stock’s price movement. While this doesn’t necessarily mean the stock will hit the average price target, it could be a good starting point for further research to identify potential fundamental driving forces.

That said, while investors should not ignore price targets entirely, making an investment decision based solely on them could lead to a disappointing return on investment. Thus, price targets should always be treated with a high degree of skepticism.

Here’s why there could be a lot of advantages at INSE

Analysts’ growing optimism about the company’s earnings prospects, as indicated by their strong consensus on upward EPS estimate revisions, could be a legitimate reason to hope for upside in the stock. Indeed, 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 5.9% over the past month, as an estimate has risen from no negative revisions.

Additionally, INSE currently has a Zacks Rank #2 (Buy), meaning it’s in the top 20% of more than 4,000 stocks we rank based on four factors relating to earnings estimates. Given an impressive externally audited track record, this is a more conclusive indication of the stock’s near-term upside potential. 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 INSE’s potential gain, the direction of price action it implies appears to be a good guide.

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