Investing

10 Big Stocks That Have Risen Above and Beyond Fair Value Targets in 2016

Jon C. Ogg

Published: August 3, 2016 8:05 am

Last Updated: January 13, 2020 4:59 am

The bull market has raged for more than seven years since the bottom in 2009. A frequent saying is that a rising tide market lifts all ships, but there are always exceptions. Sometimes there are stocks that rise above and beyond the overall market as a whole. And in that group, sometimes stocks reach valuations that are hard to justify, even if they are very well-known stocks that happen to be the market darlings of that time.

24/7 Wall St. has identified 10 different stocks that are trading at a share price above what most investors would consider a fair value. The determination of this is not just how the market multiples appear. The Thomson Reuters mean price target is the average price target of every listed analyst covering a stock. This is absolutely not intended to imply that a stock cannot rise further, but it does suggest that the current price is at least above what the average is from a bunch of smart people who understand stocks and the stock market.

Of the 10 companies trading above the consensus estimates, some have simply grown above and beyond what anyone would have ever guessed. Some have risen over 50% and 100% in 2016 (versus 6% to 7% for major indexes). Others may be in defensive sectors, which have higher valuations than normal. And some of these are turnarounds, or they have been chased because of their safe dividend yields during a low-rate or moderate-rate environment.

One thing that investors need to consider here is that analysts sometimes get their views wrong. The analyst community generally has to keep reasonable or moderate upside expectations. The typical upside of a Dow or S&P 500 stock at this time is between 8% and 15%, so a call for a Dow stock to double just would not look normal today.

Another consideration is that most analysts have to lower their price targets on the way down, and they often raise their targets on the way up. When stocks recover they often catapult above many analysts’ price targets. Then there is the other side of the coin on stocks above analyst price targets: sometimes companies outperform but analysts refuse to re-rate stocks up to much higher valuations.

24/7 Wall St. has included some color on each stock with an explanation on why they are above a fair value or consensus analyst price target. This includes trading history, whether there are dividends and how the current price compares to the consensus target.

AMD

Advanced Micro Devices Inc. (NASDAQ: AMD) closed most recently at $6.26, and its consensus analyst price target is $5.20. AMD shares have risen about 130% in 2016 and are up almost 250% from a year ago. The excitement around graphics, virtual reality and artificial intelligence and learning has been the driver here. AMD even ran recently above and beyond the more bullish analyst targets. Its smaller market cap and short sellers capitulating have contributed to much of the stock’s gain.

AMD has a 52-week trading range of $1.65 to $7.16 and a market cap of $5 billion. Investors will want to know that AMD pays no dividend, and that is likely to remain that way for years, even if the upside scenario were to come about.

American Water Works

Last seen trading at $82.07, American Water Works Co. Inc. (NYSE: AWK) has a consensus price target of just $77.31. This utility is the king of water in America, so it gets a water premium and a utility premium for safety these days. The company keeps doing well on earnings and is committed to raising dividends. It is not just above the analyst expectations, it has risen above and beyond what 24/7 would have ever assumed when we named it a stock to own for the decade. It is not normal for a water utility to gain 40% in a year, but that’s how much this one is up in 2016.

Shares have a 52-week range of $50.16 to $85.24, and the market cap is $14.6 billion. The dividend yield is 1.7%, which is lower than its historic dividend yield, as well as lower by far than power utilities.

AT&T

Shares of AT&T Inc. (NYSE: T) were last seen at $43.16, and its consensus price target was $42.27. AT&T is no longer just wireless since acquiring DirecTV. It has plenty of dividend coverage, and the dividend chase has brought in more and more equity buyers. Another boost here may be that the wireless price wars seem to be abating. At 14 times forward earnings, it is not scaring many investors, but the 30% year-to-date gain was more than even the analysts who recently raised their targets could keep up with.

AT&T has a 52-week range of $43.10 and a market cap of $42.27 billion. Its dividend yield is 4.4%.
Caterpillar

Caterpillar Inc. (NYSE: CAT) closed most recently at $81.24, but its consensus price target is $71.50. Caterpillar seems to be stuck between a rock and a hard place. Each earnings report, even if not bad, has some disappointment in guidance or restructuring. The global economy just is not great for Caterpillar as so many growth markets are not growing. Still, its shares are up 24% so far in 2016. Despite being only $3 from its 52-week high, Caterpillar remains 30% below its high in the past five years.

The 52-week range is $56.36, the market cap is $47 billion and the dividend yield is 3.7%.

Groupon

Shares of Groupon Inc. (NASDAQ: GRPN) were just trading at $5.10, though its consensus price target was $4.76. The company just recent saw its shares surge sharply on good earnings. Now the stock is up well over 60% so far in 2016, and the company’s turnaround may still have legs to run. The short interest and the low market cap (and a low stock price) also seem to have allowed this run to be more than most investors expected.

Groupon has a 52-week range of $2.15 to $5.28 and a market cap of $3 billion. It pays no dividends, and it is such a new company and in a turnaround that has yet to yield massive profits. That likely will keep its dividend ambitions rather low for quite some time.

IBM

Last seen trading at $160.58, International Business Machines Corp. (NYSE: IBM) has a consensus price target of just $153.90. The shares acted like they wanted to go down to $100 in the last selling wave, but a recovery and hope for value took the stock back above even where many of the more tame analysts expected. The reality is that it’s hard to find that many Big Blue bulls. IBM’s core business remains pressured, but the negativity and low valuations have allowed shares to recover handily for a gain of almost 20% so far in 2016.

IBM’s 52-week range is $116.90 to $163.60, and the market cap is $153 billion. The company has focused more on buybacks than on dividends, but it has a yield of 3.5% after hikes in recent years, despite a lagging stock price.

Lululemon

Lululemon Athletica Inc. (NASDAQ: LULU) closed most recently trading at $76.95, and its consensus price target was $71.93. The company had its share of problems, from see–through pant issues and quality control, and that crushed the valuations for the growth stock. After bottoming out under $40, it was apparently the buy of a lifetime. The stock has hardly pulled back since last October, and its shares are up 49% year to date.

Shares have traded in 52-week range of $43.14 to $78.79, and the market cap is $10.5 billion. Like many other growth stocks, it has yet to pay a dividend.

Silver Wheaton

After hitting a 52-week high of $29.59 on Tuesday (Aug. 2) in the wake of signing a gold streaming deal in Brazil, Silver Wheaton Corp. (NYSE: SLW) closed at $29.23. Its consensus price target is $27.57. The stocks who win from gold and silver prices have screamed higher in 2016, some doubling or tripling off their 52-week lows. This surge in gold caught most investors and analysts off guard from more muted targets at the start of 2016. The reality is that gold and silver stocks have had the best year in many years, and those price targets actually have been rising — but many haven’t caught up.

Silver Wheaton has a 52-week range of $10.04 to $29.59. Its market cap is $12.9 billion, and it has a dividend yield of just 0.7%, but its gain is over 130% so far in 2016.

Travelers

Shares of Travelers Companies Inc. (NYSE: TRV) were last seen trading at $117.03, and its consensus price target was $114.29. This is the Dow stock most people forget about, but it has managed to avoid many of the would-be woes of the banks and other financial players. Still, its performance is only up about 5% in 2016 and about 12% from a year ago. This may be one of those situations where analysts just haven’t wanted to re-rate it on the way up. After all, this stock has more than doubled in the past five years.

Travelers shares have changed hands between $95.21 and $119.30 in the past year. The market cap is $33.7 billion, and the dividend yield is 2.3%.

Wal-Mart

The $69.46 consensus price target on Wal-Mart Stores Inc. (NYSE: WMT) compares to the most recent close at $73.13 a share. One reason Wal-Mart is above the average price target is that the stock was crushed in 2015 after waves of sales disappointments, but then it came back much faster in 2016 after the analysts had lowered their price targets too low. The price seems to run into recent buying and selling that may be undecided, but the price gain has been 22% so far in 2016.

Wal-Mart has a 52-week range of $56.30 to $74.35 and a market cap of $227.5 billion. The dividend yield is 2.7%.

What’s key is that each stock is above the consensus analyst target for its own reason. Some may keep rising and keep adding insults to the analysts following them. Then again, some might have gotten ahead of themselves, with the Dow up 6% and the S&P 500 up almost 7% so far in 2016. Whatever happens, the reality is that gains of 30%, 50% and even 100% in less than a year are not generally normal.