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conflicting views of two different analysts

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You are a junior analyst at a well-known mutual fund company (i.e., a buy-side analyst) and are assigned to value, say, the stock of General Electric. You look around at what famous analysts have written and you find one who says that the stock is overpriced at its current price (roughly $33/ share as of June 27, 2006). Another, not surprisingly, thinks that the stock is a strong buy, with a target price of $60. You know you will be asked about these views when you present your results. How might you go about reconciling them? What do you think about the above stock overpriced?

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You are a junior analyst at a well-known mutual fund company (i.e., a buy-side analyst) and are assigned to value, say, the stock of General Electric. You look around at what famous analysts have written and you find one who says that the stock is overpriced at its current price (roughly $33/ share as of June 27, 2006). Another, not surprisingly, thinks that the stock is a strong buy, with a target price of $60. You know you will be asked about these views when you present your results. How might you go about reconciling them? What do you think about the above stock overpriced?

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It is not at all surprising to see conflicting views of two different analysts for the same stock. Each analyst has its own valuation criteria and assumptions for valuing a stock. Further, the differences in views can also arise due to the differences in time frame of their outlook. For example, in the above mentioned case of GE, the first analyst who holds the view that the stock is overpriced might be talking from a short term perspective, while the analyst who is very bullish on the stock and is giving a buy recommendation may be speaking from a long term point of view. Thus, we need to conduct an in depth analysis of the two conflicting views to arrive at a consensus in terms of decision making to buy, hold or sell the stock.

In my view, the analysts who is of the view that the stock is overpriced at current levels ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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