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How Valuable Are Target Price Forecasts to Factor Investing?

Hamza Bahaji
The Journal of Portfolio Management Quantitative Special Issue 2022, 48 (2) 164-180; DOI: https://doi.org/10.3905/jpm.2021.1.305
Hamza Bahaji
is head of Engineering and Solutions at AMUNDI ETF, Indexing and Smart Beta and an associate professor of finance at the University of Paris Dauphine in Paris, France
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  • For correspondence: hamza.bahaji@amundi.com
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Abstract

The informativeness of financial analysts’ stock recommendations to investors has become the subject of much scrutiny and debate. This article investigates the investment value of target price (TP) forecasts under the specific angle of factor investing. It provides directions to quantitative portfolio managers for the integration of signals conveyed by those forecasts in systematic and rule-based investment decisions. Using TP data from 1999 to 2019 in Europe and North America, the author first documents a decline in analyst opinion on the performance of most equity factors and finds that their forecasts are style biased. He shows that a long-only strategy that picks best-ranked stocks according to consensus TP implied expected returns (CTPER) generates substantial alpha within large-cap, low-idiosyncratic-risk, and noncyclical stocks. Embedding the CTPER signal into the momentum factor helps materially improve its risk and return profile. Those findings support the idea of adequately using TP forecasts in the design of top-down multifactor portfolio construction frameworks.

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The Journal of Portfolio Management: 48 (2)
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How Valuable Are Target Price Forecasts to Factor Investing?
Hamza Bahaji
The Journal of Portfolio Management Dec 2021, 48 (2) 164-180; DOI: 10.3905/jpm.2021.1.305

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How Valuable Are Target Price Forecasts to Factor Investing?
Hamza Bahaji
The Journal of Portfolio Management Dec 2021, 48 (2) 164-180; DOI: 10.3905/jpm.2021.1.305
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