Is the bear market over? A fundamental Price Target perspective
Summary
It’s not a Stock Market, but a Market of Stocks
Market participants are currently puzzled by a pressing question: is the bear market over or is there more pain to come for equities? In this article we will aim to answer the question using a lot of fundamental work. To understand if the market has more upside than downside, we need to define the recent rally leaders, create DCF models for each, and set price targets.
The distance from closing price to Price Target will tell us if there is indeed more upside, or if there is more risk than reward in the current setup. We shall rely on our Machine Learning models and company guidance to generate these models. The aim of this research piece is not necessarily to create accurate models individually, but as a group.
Defining Market Leadership
In order for us to focus on the correct companies, we need to find out what individual stocks are leading the market higher. Helping us achieve that goal is the concept of BETA, combined with Market-Cap. A stock’s beta is calculated using both correlation and covariance; the higher the number, the more that stock is moving with the market. Having a significant Market-Cap insures that the stock is also a driver for the market due to it’s size.
We set the screener to the top 100 companies by Market-Cap (X-Axis) and Beta to SPY to a minimum of 1 (Y-Axis). Unsurprisingly, the stocks that stand out by blending these 2 metrics include a lot of the usual suspects. We’ll note their weighting in the S&P 500 for reference (excepting TSM, since it is non-US):
Apple Inc. (AAPL) - 7.1%
Microsoft Corp. (MSFT) - 6.0%
Alphabet Inc. Class C & Class A (GOOG, GOOGL) - 4.2%
Amazon.com, Inc. (AMZN) - 3.7%
Tesla, Inc. (TSLA) - 2.4%
Nvidia Corp. (NVDA) - 1.8%
Meta Platforms, Inc. Class A (META) - 1.3%
Broadcom Inc (AVGO) - 0.71%
Mastercard Incorporated Class A (MA) - 0.92%
Home Depot, Inc. (HD) - 0.95%
Combined weight in the S&P500: 29.08% - it’s safe to say these are the companies moving the market.
Analyst Price Targets and Statistics
We’ll input these stocks into our new Risk Explorer Screener in order to quickly assess both their fundamental and statistical risk-reward set-up.
You can enlarge the picture and see the average combined expected move (assuming equal weight positions). We are more interested in their fundamental distance to Price-Target in this article (currently at 13.77%), so let’s adjust that for index-weighting.
That comes down to an expected 15.65 % combined price appreciation, if all of these companies would reach their analyst Price Targets in the next year. However, are those Price Targets realistic? What are the underlying assumptions? Is AMZN stock really worth 41% more than it’s currently trading at?
We need to investigate further and create our own models in order to validate these assumptions. We will employ the help of our ML models for this task, and set projections to Neutral. As an extra step before assigning a Price Target, we will check with individual sell-side analysts and see if they agree.
Models & Price Targets
Apple Inc. (AAPL)
Signal Sigma PT: $170
Analyst PT: $169.17
Upside: 12.58%
Analyst William Power from Robert W. Baird has set a Price Target of $170 for AAPL stock on February 3, 2023.
Amazon.com, Inc. (AMZN)
Signal Sigma PT: $105
Analyst PT: $137.73
Upside: 7.57%
Barton Crockett from Rosenblatt Securities has assigned a Price Target of $106 for AMZN stock on February 3, 2023.
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I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
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