HNI’s 47% Rally Hopes Rise as Wall Street Analysts Predict Upside
Potential Upside in HNI Shares as Analysts Predict Better Earnings
Shares of HNI have gained 8.8% over the past four weeks to close at $47.26, but there could still be a solid upside left in the stock if short-term price targets of Wall Street analysts are any indication.
Understanding Short-Term Price Targets
Going by the price targets, the mean estimate of $69.50 indicates a potential upside of 47.1%. The average comprises four short-term price targets ranging from a low of $63 to a high of $80, with a standard deviation of $7.59. While the lowest estimate indicates an increase of 33.3% from the current price level, the most optimistic estimate points to a 69.3% upside.
The Role of Standard Deviation
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. In this case, the standard deviation is $7.59, which suggests that there is a significant degree of disagreement among analysts about the potential upside in HNI shares.
The Limitations of Analysts’ Price Targets
While the consensus price target is highly sought after by investors, the ability and unbiasedness of analysts in setting price targets have long been questionable. And investors making investment decisions solely based on this tool would arguably do themselves a disservice. 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.
Business Incentives and Overly Optimistic Price Targets
Wall Street analysts have deep knowledge of a company’s fundamentals and the sensitivity of its business to economic and industry issues. However, many of them tend to set overly optimistic price targets. This is often due to business incentives of firms covering a stock. Analysts may set inflated price targets to drum up interest in shares of companies that their firms either have existing business relationships with or are looking to be associated with.
The Importance of Agreement Among 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.
Strong Agreement Among Analysts in Revising EPS Estimates
There has been increasing optimism among analysts lately about HNI’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.
Upside Potential and Zacks Rank
Over the last 30 days, the Zacks Consensus Estimate for the current year has increased 7.2%, as one estimate has moved higher compared to no negative revision. Moreover, HNI currently has a Zacks Rank #2 (Buy), which means it is in the top 20% 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.
Conclusion
While the consensus price target may not be a reliable indicator of how much HNI could gain, the direction of price movement it implies does appear to be a good guide. Investors should treat price targets with a high degree of skepticism and consider other factors that indicate a potential upside in HNI shares.
