Shares of Norwegian Cruise Line (NCLH) have climbed 2.9% in the past four weeks, closing the last trading session at $17.85. But, could there be even more upside potential for this stock? Wall Street analysts seem to think so, with their short-term price targets pointing to a potential gain.
The average of these price targets stands at $22.53, suggesting a possible 26.2% increase from the current price. This average is calculated from 18 individual price targets, ranging from a low of $17.50 to a high of $32. While the lowest estimate implies a 2% decline, the most optimistic projection points to a whopping 79.3% upside.
However, it’s important to consider the standard deviation of these estimates, which measures the variability among them. A smaller standard deviation indicates greater agreement among analysts. While the consensus price target is often sought after by investors, relying solely on this metric for investment decisions might not be wise. The reliability and impartiality of analysts in setting price targets have long been questioned.
For NCLH, however, the impressive average price target is not the only positive indicator. The strong consensus among analysts regarding the company’s ability to surpass earlier earnings expectations further supports a potential upside. While a positive trend in earnings estimate revisions doesn’t directly measure stock gains, it has proven to be a powerful predictor of potential upside.
Understanding Analyst Price Targets
Research conducted at several universities worldwide has revealed that price targets are just one piece of information about a stock, and often mislead investors more than they guide. Empirical research consistently shows that price targets set by analysts, regardless of the degree of agreement, rarely accurately predict a stock’s price trajectory.
While Wall Street analysts possess deep knowledge of a company’s fundamentals and how its business is affected by economic and industry trends, many tend to set overly optimistic price targets. This can be attributed to their desire to generate interest in shares of companies that their firms have existing business relationships with or seek to partner with. In other words, the business incentives of firms covering a stock often lead to inflated price targets set by analysts.
However, a tight clustering of price targets, reflected in a low standard deviation, suggests a high degree of agreement among analysts about the direction and magnitude of a stock’s price movement. While this doesn’t guarantee that the stock will reach the average price target, it can serve as a good starting point for further research to identify potential fundamental driving forces.
Therefore, while investors shouldn’t entirely disregard price targets, making investment decisions solely based on them can lead to disappointing returns on investment (ROI). Price targets should always be approached with a high degree of skepticism.
Why NCLH Could See Continued Upside
Recent optimism among analysts regarding the company’s earnings prospects has been growing, as evidenced by the strong consensus among them in revising EPS estimates upward. This could be a valid reason to anticipate upside in the stock. Empirical research demonstrates a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
Over the past 30 days, the Zacks Consensus Estimate for the current year has increased by 14%, with six estimates moving higher and no negative revisions. Furthermore, NCLH currently boasts a Zacks Rank #1 (Strong Buy), placing it within the top 5% of over 4,000 stocks ranked based on four factors related to earnings estimates. This impressive externally-audited track record provides a more conclusive indication of the stock’s potential upside in the near term.
Therefore, while the consensus price target may not be a reliable indicator of the magnitude of NCLH’s potential gains, the direction of price movement it suggests does appear to be a valuable guide.
