Shares of Design Therapeutics, Inc. (DSGN) has gained 23.7% over the past four weeks and closed the last trading session at $5.01, but there could still be solid upside potential for the stock using Wall Street analysts’ short-term price targets as an indicator. Going by price targets, the median estimate of $7 suggests a potential upside of 39.7%.
The average includes three short-term price targets ranging from a low of $4 to a high of $12, with a standard deviation of $4.36. While the lowest estimate indicates a decline of 20.2% from current price levels, the most optimistic estimate suggests an upside potential of 139.5%. More than the range, the standard deviation is worth paying attention to here, as it helps understand the variability in estimates. The smaller the standard deviation, the greater the consensus among analysts.
Although the consensus price target is highly sought after by investors, the ability and impartiality of analysts in setting price targets has long been questioned, and investors who make investment decisions based solely on this tool would probably be doing themselves a disservice.
However, for DSGN, an impressive average price target is not the only indicator of possible upside. The strong consensus among analysts on the company’s ability to report better earnings than previously forecast reinforces this view. While a positive trend in earnings estimate revisions is not an indicator of how much a stock could gain, it has proven to be informative in predicting upside potential.
What you may not know about analysts’ price targets
According to researchers from several universities around the world, a price target is one of many pieces of information about a stock that misleads investors far more often than it guides them. In fact, empirical research shows that price targets set by multiple analysts, no matter how much they agree, rarely provide insight into where a stock’s price might actually go.
Although Wall Street analysts have a deep understanding of a company’s fundamentals and its exposure to economic and industry issues, many of them tend to set overly optimistic price targets. Wonder why?
They typically do this to generate interest in stocks of companies with which their firms either already have business relationships or with which they want to be associated. In other words, business incentives from firms covering a stock often lead analysts to set inflated price targets.
However, a tight clustering of price targets, represented by a low standard deviation, suggests that analysts are broadly in agreement about the direction and magnitude of a stock’s price move. While this does not necessarily mean that the stock will hit the average price target, it could be a good starting point for further research aimed at identifying the potential fundamental drivers.
While investors should not completely ignore price targets, an investment decision based solely on them can lead to a disappointing ROI. Price targets should therefore always be viewed with great skepticism.
That’s why DSGN still has a lot of potential for improvement
Recently, optimism among analysts regarding the company’s earnings prospects has increased, as evidenced by the strong consensus among them to revise EPS estimates upwards. And that could be a legitimate reason to expect an uptick in the stock. After all, empirical research shows a strong correlation between trends in earnings estimate revisions and near-term share price movements.
The Zacks Consensus Estimate for the current year has risen 7.4% over the past month, as two estimates came in higher while there were no negative revisions.
Additionally, DSGN currently has a Zacks Rank #2 (Buy), meaning it ranks in the top 20% of the 4,000+ stocks we evaluate using four factors related to earnings estimates. Given an impressive outside-audited track record, this is a more conclusive indication of the stock’s potential upside in the near term. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
While the consensus price target may not be a reliable indicator of how much DSGN could gain, the direction of price movement it implies does seem to be a good guide.
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