For an analyst, the phrase "long term" appears to mean next quarter rather than this one. Indeed, it is difficult to find analysts who are focused on a company's long term prospects. For a most recent example, consider the analyst response to the recent swine flu outbreak.
While the Center for Disease Control and Prevention has certified that people cannot get swine flu from eating pork or related products, that has not prevented cautious consumers and global trade partners from holding off on their pork purchases for the time being. A classic temporary occurrence, right? Surely, this should have a minimal impact on the long-term value of pork producers.
Not so, according to many analysts, who have slashed their target prices of many affected companies. For example, Christopher Bledsoe of Barclays reduced his target price for Smithfield Foods (SFD), from $24 to $6, despite the fact that he acknowledges the company's products are not affected:
"The fact that pork is deemed safe to eat when properly cooked is likely to be ignored initially by enough consumers and governments globally to impact (Smithfield's) profit recovery."
Apparently, this profit recovery impact slices the SFD's worth by 75%!
Value investors are cautioned not to fall prey to such herd mentalities. Rather than selling when others are selling and buying when others are buying, long term investors have the opportunity to take advantage of such price swings in order to buy companies at a discount to their intrinsic values.
For other recent examples of analyst folly, see articles here and here.
Disclosure: None
This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
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