We have previously observed that sell-side analyst valuations have a tendency to gravitate around share prices. Yet the anchoring bias to their own valuations can sometimes be just as strong, particularly when prices fall sharply, as is currently the case with Slater and Gordon.
The target price of consensus analysts for Slater and Gordon (ASX: SGH) has moved in lock step with the share price since 2014. And when the company announced the ill-fated acquisition of Quindell in early 2015, consensus deemed the combined entity was worth $9 per share.
The market (and Montgomery) clearly thought otherwise, and ever so slowly, the consensus price target has moved lower and lower. Like trying to turn the Titanic.
While there are a number of reasons to explain this anchoring bias, much of it comes down to human nature. We don’t like admitting that we’re wrong, yet the stock market can be a tough proving ground.
Anchoring bias isn’t unique to sell-side analysts. Investors can become just as attached to their own company valuations, and when these differ significantly from the market price it can require significant soul-searching and humility to determine if the original thesis is sound, or if a key variable has been missed. Investors can reduce defensiveness to a position by constantly challenging the assumptions underlying the investment.
Since sell-side recommendations (Buy, Hold and Sell) are typically tied to discretionary differentials between price targets and share prices, we have the curious case where only two sell-side analysts recommend selling Slaters, despite the price targets gradually declining. Perhaps reversions will quicken following the UK Government’s proposed regulatory changes to traffic accident claims?
Ben MacNevin is an Analyst with Montgomery Investment Management.
SGH Price at posting:
$1.13 Sentiment: Buy Disclosure: Held
Ben MacNevin December 1, 2015
