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Saturday, May 10th, 2014
the hype machine

14 0510 zMCP

I recently saw someone refer to Molycorp (MCP) as one of the greatest “pump and dump” schemes ever.  In the last week it lost about a third of its market cap in the wake of a disappointing earnings report.  Stories also mentioned a downgrade by J.P. Morgan from “neutral” to “underweight.”

Then I saw a tweet from Jamie Lissette (@jamielissette) that referenced $105 price targets on MCP from J.P. Morgan back in the day.

So, we are back to the folly of price targets (we have a target theme going here), something I have written about many times in the past, including in an essay that said they are “best understood as marketing tools rather than analytical ones.”

The chart illustrates the public market history of MCP.  In the top panel are the stock price, the consensus target price, and the target at J.P. Morgan, including the $105 plateau.  The bottom panel shows the percentage upside implied by each of the target prices.

The real damage to investors was done during 2011 and 2012 when the hype machine was going full steam even as MCP was falling from its highs.  Implied upside was routinely near 100%.

Over what time frame?  Who knows?  According to Bloomberg’s data the J.P. “forecasts” were for anywhere from three to twelve months, and in some cases not specified.  Industry practice can best be described as “whatever.”

With what kind of discount rate to account for its riskiness (and the embedded broad market expectations)?  Who knows?  It’s easier and more powerful to throw a number based on simple arithmetic, “This will sell for X times earnings of Y.”  And then it’s on to the hyping of the narrative.

J.P. Morgan, which was a lead manager on all but one of the offerings indicated in the top panel, pulled its target price in October after the latest one of those offerings.

We all get stuff wrong, but my guess is that if you look at the history of Morgan’s reports (and those of other firms), you’ll get a short lesson in how the hype machine works.  Institutional investors should be immune to such pressure, but it’s amazing how often they fall for the game and its lingo.  Individuals are captivated by it.

Remember:  For the most part, the target is you.

Don’t forget to check out my ebook, “Letters to a Young Analyst.”