Shares of XPEL, Inc. (XPEL) have been on a roll lately, gaining 12.2% over the past four weeks. As of the last trading session, the stock closed at $43.49. But could there be even more upside potential in store for XPEL? Wall Street analysts seem to think so.
Their short-term price targets suggest a significant upside for the stock. The mean estimate of $65 indicates a potential gain of 49.5%. This average is derived from three price targets, with a standard deviation of $17.58.
While the lowest estimate of $52 represents a 19.6% increase from the current price, the most optimistic analyst sees the stock surging 95.5% to reach $85. It’s important to consider the standard deviation, which reflects the variability among analysts’ estimates. A smaller standard deviation signifies a greater level of agreement.
While the consensus price target is often highly sought after by investors, it’s crucial to recognize that the ability and unbiasedness of analysts in setting these targets have been questioned for years. Making investment decisions solely based on price targets could lead to suboptimal results.
However, in the case of XPEL, a strong average price target is not the only indicator of potential upside. A significant factor is the strong agreement among analysts about the company’s ability to outperform their earlier earnings predictions. This positive trend in earnings estimate revisions, while not a guarantee of stock gains, has historically been a strong predictor of upward movement.
The Caveats of Price Targets
Research from various universities has highlighted that price targets are often misleading for investors. Empirical studies consistently show that analyst price targets, regardless of agreement level, rarely accurately predict stock price movements.
Although Wall Street analysts possess deep knowledge of a company’s fundamentals and its sensitivity to economic and industry factors, many tend to set overly optimistic price targets. Why? Oftentimes, it’s driven by business incentives. Firms may have existing business relationships with the companies they cover or are seeking to establish new relationships. As a result, analysts might inflate price targets to generate interest in these stocks.
However, a tight clustering of price targets, indicated by a low standard deviation, suggests a high level of agreement among analysts regarding the direction and magnitude of a stock’s price movement. While this doesn’t guarantee the stock will hit the average target, it can serve as a valuable starting point for further research aimed at identifying underlying fundamental drivers.
While investors shouldn’t completely disregard price targets, relying solely on them for investment decisions could lead to disappointing returns on investment. Therefore, it’s essential to approach price targets with a healthy dose of skepticism.
Reasons for XPEL’s Potential Upside
The increasing optimism among analysts regarding XPEL’s earnings prospects, as evidenced by their strong agreement in revising earnings per share (EPS) estimates upwards, provides a compelling reason to anticipate upside in the stock. Empirical research has consistently shown a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
For the current year, one analyst has raised their estimate in the past 30 days, with no downward revisions. This has resulted in a 3.1% increase in the Zacks Consensus Estimate. Furthermore, XPEL currently holds 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.
Given its impressive externally audited track record, this Zacks Rank provides a more conclusive indication of the stock’s potential upside in the near term.
While the consensus price target may not be a definitive indicator of how much XPEL could gain, the direction of price movement it implies appears to be a reliable guide.
