Fundamental vs. Technical Targets

In October 2013 we wrote here about a real-time experiment comparing the end-of-year price targets of two baskets of stocks, one recommended by GS and the other recommended by JPM, with the corresponding price targets obtained from our flagship OddsTrader app:

Recently, as reported by Business Insider, both Goldman Sachs and JP Morgan came up with year-end predictions for the SP500 and a list of stocks attractive from a fundamental (valuation) point of view. They provided end-of-year targets for them as well.

We thought it may be interesting to compare the findings of their fundamental approach to price targets obtained from pure technical analysis tools, and see how they compare to each other. For purposes of this comparison we'll use Hurst channels. The benefit of Hurst channels is twofold: first, they do a great job of defining the trend and projecting the future trading range with high accuracy and confidence; and second, by using the OddsTrader app, you can access the benefits of this powerful tool with just a tap of your finger. There's no need for building complicated valuation models…

At the end of that article we promised to follow up with an analysis of the results.

Since Goldman Sachs has released a new list of 40 stocks with the most upside potential, we decided to share the outcome of our 2013 study and begin another one. 

In summary, only 4 out of 41 price targets supplied by GS and JPM (less than 10%) were more accurate than the OddsTrader targets. In fact, our targets for the JPM portfolio differed from the actual year-end prices by an average of 25 cents. JPM's targets differed from actual year-end prices by an average of $3.25.

The disparity between our predictions and GS's targets for the GS portfolio was even greater. Our targets differed from actual results by an average of $3 while GS's projections differed by an average of $11.

The table above shows that GS's targets were often double-digits higher than OT app targets. As we noted, "GS seems to be recommending to their clients a portfolio of stocks with a lot more aggressive and speculative targets." 

Which brings us to GS's current list of undervalued stocks. Below we repeat our experiment from last year by comparing GS's target prices, derived from their fundamental analysis, with our technical analysis targets based on Hurst channels. Our only guiding principle in selecting the channels is that they obey Hurst's main rule that a properly drawn channel should contain all but a few extreme data points. The targets we provide are for the first half of 2014, ending on the last trading day of June.

In all cases, except two (BTU and X), our targets are lower than GS's. 

Here is the list:

(Note: we changed the inaccurate prices reported by Business Insider for PVH, BTU and APA.)

As usual, we'll follow up with the results in the second half of 2014.

If you are concerned that the US stock market may be ready for a pull-back which will drag all stocks down, regardless of their strong fundamentals, keep in mind that OddsTrader also contains tools for position sizing and risk and portfolio management. The app provides both upside and downside targets (a rarity for Wall Street research), along with stop/loss and entry/exit levels, risk/reward ratios, volatility measures, bullish and bearish swing targets, cycles, and more.

In summary, our app provided more realistic price targets than those of JPM and GS. It also allowed us to easily estimate the quality of the analysts' recommendations and determine, in advance, which analyst was being more speculative.

*Note about Hurst Channels (click on image to enlarge). Read more about the OT app's indicators here.