PT - JOURNAL ARTICLE AU - Hamza Bahaji TI - How Valuable Are Target Price Forecasts to Factor Investing? AID - 10.3905/jpm.2021.1.305 DP - 2021 Nov 03 TA - The Journal of Portfolio Management PG - jpm.2021.1.305 4099 - https://pm-research.com/content/early/2021/11/03/jpm.2021.1.305.short 4100 - https://pm-research.com/content/early/2021/11/03/jpm.2021.1.305.full AB - 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.Key Findings▪ Financial analyst opinion on the performance of most equity factors has declined over time. Their TP forecasts are style biased.▪ Long-only strategies that pick the best-ranked stocks according to CTPER generate substantial alpha within large-cap, low-idiosyncratic-risk, and noncyclical stocks.▪ Enriching the stock selection criterion of the momentum factor with the CTPER signal improves its risk and return profile.