Wall Street Analysts Believe Tactile Systems Technology (TCMD) Could Rally 45.9%: Here's is How to Trade

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Shares of Tactile Systems Technology (TCMD) have gained 3.1% over the past four weeks to close the last trading session at $14.62, but there could still be a solid upside left in the stock if short-term price targets of Wall Street analysts are any indication. Going by the price targets, the mean estimate of $21.33 indicates a potential upside of 45.9%.

The average comprises three short-term price targets ranging from a low of $16 to a high of $25, with a standard deviation of $4.73. While the lowest estimate indicates an increase of 9.4% from the current price level, the most optimistic estimate points to a 71% upside. More than the range, one should note the standard deviation here, as it helps understand the variability of the estimates. The smaller the standard deviation, the greater the agreement among analysts.

While the consensus price target is a much-coveted metric for investors, solely banking on this metric to make an investment decision may not be wise at all. That's because the ability and unbiasedness of analysts in setting price targets have long been questionable.

But, for TCMD, an impressive average price target is not the only indicator of a potential upside. Strong agreement among analysts about the company's ability to report better earnings than they predicted earlier strengthens this view. While a positive trend in earnings estimate revisions doesn't gauge how much a stock could gain, it has proven to be powerful in predicting an upside.

Here's What You May Not Know About Analysts' Price Targets

According to researchers at several universities across the globe, a price target is one of many pieces of information about a stock that misleads investors far more often than it guides. In fact, empirical research shows that price targets set by several analysts, irrespective of the extent of agreement, rarely indicate where the price of a stock could actually be heading.

While Wall Street analysts have deep knowledge of a company's fundamentals and the sensitivity of its business to economic and industry issues, many of them tend to set overly optimistic price targets. Are you wondering why?

They usually do that to drum up interest in shares of companies that their firms either have existing business relationships with or are looking to be associated with. In other words, business incentives of firms covering a stock often result in inflated price targets set by analysts.

However, a tight clustering of price targets, which is represented by a low standard deviation, indicates that analysts have a high degree of agreement about the direction and magnitude of a stock's price movement. While that doesn't necessarily mean the stock will hit the average price target, it could be a good starting point for further research aimed at identifying the potential fundamental driving forces.

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