Shares of Accel Entertainment (ACEL) has gained 3.4% over the past four weeks to close the latest trading session at $10.47, but there could still be a solid rally in the stock if Wall Street analysts’ near-term price targets are any indication. In terms of price targets, the average estimate of $14.33 indicates a potential upside of 36.9%.
The average estimate consists of three short-term price targets with a standard deviation of $1.15. While the lowest estimate of $13 indicates a 24.2% upside from the current price level, the most bullish analyst expects the stock to jump 43.3% to reach $15. Here it is very important to note the standard deviation as it helps to understand the variability of the scores. The smaller the standard deviation, the greater the agreement between analysts.
Although the consensus target price is a very desirable metric for investors, relying on this metric alone to make an investment decision may not be prudent. This is because the ability and impartiality of analysts to set price targets has long been questioned.
However, the impressive consensus price target isn’t the only factor pointing to potential upside for ACEL. That view is bolstered by consensus among analysts that the company will report better earnings than what they had previously estimated. While the bullish trend in earnings forecast revisions doesn’t give any indication of how much the stock could rise, it has proven effective in predicting an upside.
Here’s what you need to know about analysts’ price targets
According to researchers from several universities around the world, target price is one of many pieces of stock information that misleads investors far more often than it directs them. In fact, empirical research shows that price targets set by several analysts, regardless of the degree of agreement, rarely indicate where a stock’s price may actually be headed.
While Wall Street analysts have a deep understanding 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. Are you wondering why?
They usually do this to generate interest in shares of companies with which their firms either have existing business relationships or are seeking to be associated. In other words, the business incentives of firms covering stocks often lead to inflated price targets set by analysts.
However, the 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 the stock’s price movement. While this does not necessarily mean that the stock will reach the target average price, it can be a good starting point for further research aimed at identifying potential underlying drivers.
However, while investors should not ignore price targets entirely, making an investment decision based solely on them can lead to disappointing investment returns. So price targets should always be treated with a high degree of skepticism.
Why ACEL could witness solid growth
Recently, there has been growing optimism among analysts about the company’s earnings outlook, as evidenced by strong consensus among them to revise higher EPS estimates. And that may be a good reason to expect the stock to rise. After all, empirical research shows a strong relationship between trends in earnings forecast revisions and short-term stock price movements.
Over the last 30 days, the Zacks Consensus Estimate for the current year has increased 14.7%, as one estimate has gone up compared to no negative revision.
What’s more, ACEL currently has a Zacks Rank #2 (Buy), meaning it’s in the top 20% of the more than 4,000 stocks we rank based on four factors related to earnings estimates. Given impressive external audit results, this is a more compelling indication of potential upside for the stock in the near term. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, while the consensus target price may not be a reliable indicator of how much ACEL could earn, the direction of price movement it implies seems to be a good guide.
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