*4.2. Analysis of Target Price Accuracy*

"TPMetAny" [7].

*4.2. Analysis of Target Price Accuracy* This research will consider two forms of accuracy (or hit rate), meaning whether the target price was met (=hit) or not (=miss)—which is a binary class label with only two outcomes. The first version, referred to as "Year-End", focuses on whether the stock price has reached the target price 12 months after a change in the mean target price (Yes/No). The second version, referred to as "Year-Highest", determines whether the stock price met the target price (Yes/No) at any point during the 12 months after a change in the mean This research will consider two forms of accuracy (or hit rate), meaning whether the target price was met (=hit) or not (=miss)—which is a binary class label with only two outcomes. The first version, referred to as "Year-End", focuses on whether the stock price has reached the target price 12 months after a change in the mean target price (Yes/No). The second version, referred to as "Year-Highest", determines whether the stock price met the target price (Yes/No) at any point during the 12 months after a change in the mean target price. In the previous literature, the measure for achieving the target price at

target price. In the previous literature, the measure for achieving the target price at year-

For the given 75 clean energy companies and target prices over the time period from 2009 to 2020, the mean accuracy for the Year-End target is 46.6% whereas the mean accuracy for the Year-Highest setup is 68.1%. It is unsurprising that the accuracy for the Year-Highest target is higher than that of the Year-End given that it measures whether the target price is met at any time during the 12-month window (including at year-end) whereas the Year-End target only measures the accuracy at a single point in time, at the end of the 12-month period. A comparison of the implied return of target prices and the accuracies found in previous studies is displayed in Table 2 (ordered by the period). The previous studies covered different time periods and it is apparent that the average implied return is considerably higher in time periods extending from 1997 compared to all that exclude years before 2000. Only a few studies reported the accuracy of target prices and the results for the clean energy stocks covered in this study seem to be in line with these results,

year-end was termed "TPMetEnd" and for accomplishing it at any point during the year "TPMetAny" [7].

For the given 75 clean energy companies and target prices over the time period from 2009 to 2020, the mean accuracy for the Year-End target is 46.6% whereas the mean accuracy for the Year-Highest setup is 68.1%. It is unsurprising that the accuracy for the Year-Highest target is higher than that of the Year-End given that it measures whether the target price is met at any time during the 12-month window (including at year-end) whereas the Year-End target only measures the accuracy at a single point in time, at the end of the 12-month period. A comparison of the implied return of target prices and the accuracies found in previous studies is displayed in Table 2 (ordered by the period). The previous studies covered different time periods and it is apparent that the average implied return is considerably higher in time periods extending from 1997 compared to all that exclude years before 2000. Only a few studies reported the accuracy of target prices and the results for the clean energy stocks covered in this study seem to be in line with these results, especially the most recent ones from Bradshaw, Brown, and Huang [7] and Kerl [11]. Since 2020 appears to have been an extraordinary year with also a very high accuracy (see Figure 5) the accuracy values excluding this year are also presented, which are even closer to the results found in the literature.


**Table 2.** Target price and accuracy comparison.

<sup>1</sup> Brav and Lehavy [3] report a one-year-ahead target price that is 28% larger than the current stock price and 32.9% higher than the preannouncement stock price (2-days prior recommendation/target price announcement). <sup>2</sup> Excluding the year 2020, which is exceptional due to the COVID-19 pandemic. <sup>3</sup> Excluding the year 2020, which is exceptional due to the COVID-19 pandemic.

> It is noteworthy that Bradshaw, Brown, and Huang [7] also provide the additional inside that TPMetEnd and TPMetAny differ considerably in down and up markets with up markets resulting in accuracies of 50% and 71% whereas down markets lead to accuracies of only 17% and 49%.

> In the following, the accuracy of the target prices (and, thus, of the target returns) is analyzed overall and by the magnitude of the mean target return, to determine if the predicted return appears to be linked to the accuracy of the prediction. The groups for the mean target return are (1) "Under 0%", reflecting an average estimate of no stock price increase, (2) from "0% up to 9.9%"—with the upper limit being the rounded median of the target return (11.5%), (3) from "10% to 29.9%"—representing approximately the range from the median to the third quartile (29.8%), (4) "30% to 70%"—with the upper limit being roughly the third quartile +1.5 times the interquartile range (72.2%), which is a common limit for outliers, and (5) target returns "Above 70%", which could statistically be considered outliers.

> Figure 5 displays, for the Year-End target, the accuracy for each of the target return groups and for each year, and Figure 6 illustrates the average (actual) return achieved by the stocks in these target return groups. The first figure illustrates that the average accuracy of target prices can differ considerably between years (from 20.8% in 2011 to 86.3% in 2020) and generally differs considerably among target return groups. For most years, the accuracy for the "Under 0%" target return group has the highest accuracy, followed by

the "0% to 9.9%" target return, which roughly represents all positive returns up to the median target return. In contrast to that, the two highest return groups, "30% to 70%" and the "Above 70%", usually are characterized by the lowest accuracy and often show 2–3 times lower accuracies than the two highest target return groups. Combining this information with the average Year-End returns for stocks in Figure 6 shows that the return group "Above 70%" has the most extreme average returns (independent of the target being hit or missed), showing in six years the highest average return and in three the lowest average return. *Sustainability* **2021**, *13*, x FOR PEER REVIEW 11 of 29 *Sustainability* **2021**, *13*, x FOR PEER REVIEW 11 of 29

**Figure 5.** Accuracy of target prices by target return group and by year for Year-End class. **Figure 5.** Accuracy of target prices by target return group and by year for Year-End class. **Figure 5.** Accuracy of target prices by target return group and by year for Year-End class.

**Figure 6.** Average return by target return group and by year for Year-End class. **Figure 6.** Average return by target return group and by year for Year-End class. **Figure 6.** Average return by target return group and by year for Year-End class.

It is noteworthy that average Year-End returns are moderately positively correlated (0.77, 0.44 excl. 2020) with the average MSCI world performance during the same time period. (The MSCI world performance is not the MSCI world return during that calendar year but the average of the 1-year return of the MSCI for the 12-month time period starting at the time of each of the target prices. Thus, the performance is the average return of the MSCI world from different starting points in that year up to 12 months in the future. For instance, if the mean target price changes in March, the MSCI world return from that point in time until March of the subsequent year is recorded. This is done so that the actual return of stocks in a given timeframe can be compared with the MSCI world return in exactly the same timeframe.) In particular, in nine out of eleven years with a positive average MSCI world performance, the average return for clean energy stocks is positive as well, whereas for the one year with a negative average MSCI world performance the clean energy stocks' performance is also negative. However, as Figure 6 shows, the magnitude of positive and negative returns for clean energy stocks appears to be larger than that of the MSCI world index. The average accuracy and return for the Year-End target by target It is noteworthy that average Year-End returns are moderately positively correlated (0.77, 0.44 excl. 2020) with the average MSCI world performance during the same time period. (The MSCI world performance is not the MSCI world return during that calendar year but the average of the 1-year return of the MSCI for the 12-month time period starting at the time of each of the target prices. Thus, the performance is the average return of the MSCI world from different starting points in that year up to 12 months in the future. For instance, if the mean target price changes in March, the MSCI world return from that point in time until March of the subsequent year is recorded. This is done so that the actual return of stocks in a given timeframe can be compared with the MSCI world return in exactly the same timeframe.) In particular, in nine out of eleven years with a positive average MSCI world performance, the average return for clean energy stocks is positive as well, whereas for the one year with a negative average MSCI world performance the clean energy stocks' performance is also negative. However, as Figure 6 shows, the magnitude of positive and negative returns for clean energy stocks appears to be larger than that of the MSCI world index. The average accuracy and return for the Year-End target by target It is noteworthy that average Year-End returns are moderately positively correlated (0.77, 0.44 excl. 2020) with the average MSCI world performance during the same time period. (The MSCI world performance is not the MSCI world return during that calendar year but the average of the 1-year return of the MSCI for the 12-month time period starting at the time of each of the target prices. Thus, the performance is the average return of the MSCI world from different starting points in that year up to 12 months in the future. For instance, if the mean target price changes in March, the MSCI world return from that point in time until March of the subsequent year is recorded. This is done so that the actual return of stocks in a given timeframe can be compared with the MSCI world return in exactly the same timeframe.) In particular, in nine out of eleven years with a positive average MSCI world performance, the average return for clean energy stocks is positive as well, whereas for the one year with a negative average MSCI world performance the clean energy stocks' performance is also negative. However, as Figure 6 shows, the magnitude of positive and negative returns for clean energy stocks appears to be larger than that of the MSCI world index. The average accuracy and return for the Year-End target by target return group is displayed in Table 3.

return group is displayed in Table 3. **Table 3.** Average accuracy and return by target return group (Year-End class). **Target Return Group Under 0% 0% to 9.9% 10% to 29.9% 30% to 70% Above 70%** Average Accuracy 73.1% 57.8% 37.9% 25.9% 17.1% return group is displayed in Table 3. **Table 3.** Average accuracy and return by target return group (Year-End class). **Target Return Group Under 0% 0% to 9.9% 10% to 29.9% 30% to 70% Above 70%** Average Accuracy 73.1% 57.8% 37.9% 25.9% 17.1% Average Return 26.6% 16.9% 16.8% 32.5% 55.7% The decrease in the average accuracy for stocks belonging to higher target return groups is in line with previous findings indicating that demonstrated that the predicted growth in the stock price is negatively impacting the forecast accuracy [2,5,11]. It is interesting to see that the average accuracy for the target prices gradually decreases with the magnitude of the implied target returns, but the same does not hold true for the average returns. The reason for that is two-fold: first, the average hit return, meaning the average

Average Return 26.6% 16.9% 16.8% 32.5% 55.7%

Average Miss Return −31.3% −15.1% −13.8% −11.0% −5.4%

The decrease in the average accuracy for stocks belonging to higher target return groups is in line with previous findings indicating that demonstrated that the predicted growth in the stock price is negatively impacting the forecast accuracy [2,5,11]. It is interesting to see that the average accuracy for the target prices gradually decreases with the magnitude of the implied target returns, but the same does not hold true for the average

The decrease in the average accuracy for stocks belonging to higher target return groups is in line with previous findings indicating that demonstrated that the predicted growth in the stock price is negatively impacting the forecast accuracy [2,5,11]. It is interesting to see that the average accuracy for the target prices gradually decreases with the magnitude of the implied target returns, but the same does not hold true for the average

return when the target price is met (=hit), tends to increase with the target return group and (2) the average miss return, meaning the average return achieved when the target price is not met, increases considerably with the target return group and, thus, is less negative. Both of these developments appear plausible. For the average hit return, the result appears plausible given that meeting higher return targets by definition means that returns below the target return group are excluded from the hit average. For instance, the average return of stocks that met their target price "Above 70%" by definition need to have achieved at least a return of 70%. In contrast, it is plausible that the average miss returns are on average negative and it appears intuitive that they increase with the target return group given that with higher return groups they may include higher returns that were still not meeting the target return. For instance, by definition, not accomplishing a return in the target return group "30% to 70%" means that returns of up to 29.9% can be contained in the miss returns. Moreover, it appears plausible that stocks with very high mean target prices tend to have higher average returns if they miss their high targets than stocks that miss considerably lower targets.


**Table 3.** Average accuracy and return by target return group (Year-End class).

Overall, it is interesting to see that the higher average hit and average miss returns tend to outweigh the decrease in the average accuracies so that even when target prices are rarely met (e.g., in the "30% to 70%" and "Above 70%" target return group), the average hit return is so high, and the average miss return is still not so low as to lead to a lower average return overall. In other words, clean energy stocks in the groups with higher mean target returns, which represent a more favorable analyst expectation than groups with lower mean target returns, also tend to be associated with higher average returns until the end of the corresponding 12-month period. This trend still holds true if target prices from the exceptional year 2020 are excluded. However, this information only provides an incomplete picture of the returns in the target return groups. It is noteworthy that while the average return tends to be higher for higher target return groups, the distribution tends to be wider, with the median showing a decreasing trend and the share of Year-End returns below zero is increasing for higher target return groups (see Figure A1 in Appendix A). The fact that the mean tends to be further from the median for higher target return groups in the most extreme case for the "Above 70%" target return the mean even exceeds the third quartile shows that there is a long tail at the higher end of the returns. Thus, higher average returns are based on a comparably small number of very high Year-End returns. This illustrates that the risk associated with stocks in higher target return groups increases but so does the potential reward, as highlighted by the average returns.

The next step is the analysis of the Year-Highest class that represents whether the target price is met at any time during the 12-month period after the mean target price changes. Figure 7 displays for the Year-Highest target the accuracy for each of the target return groups and for each year, and Figure 8 illustrates the average of the highest achievable (actual) return by the stocks in these target return groups during the 12-month period.

*Sustainability* **2021**, *13*, x FOR PEER REVIEW 13 of 29

**Figure 7.** Accuracy of target prices by target return group and by year for Year-Highest class. **Figure 7.** Accuracy of target prices by target return group and by year for Year-Highest class. **Figure 7.** Accuracy of target prices by target return group and by year for Year-Highest class.

**Figure 8.** Average return by target return group and by year for Year-Highest class. **Figure 8.** Average return by target return group and by year for Year-Highest class.

**Figure 8.** Average return by target return group and by year for Year-Highest class. The average accuracies (target hit rates) are considerably less variable for the Year-Highest class than for the Year-End class and are also consistently higher in each year (see also Figure 5). The average accuracy ranges from 42.8% (2011) to 95% (in 2020) with an overall average return of 68.1%. The average accuracy for the "Under 0%" target return group is essentially 100% every year given that the stock price is already exceeding the target price at the start. The only exceptions are three observations for which the target return is only 0.2% to 5.1% below the stock price, which drops below it during the first day and never recovers from it. The tendency that lower target return groups are more likely to be met is even stronger for the Year-Highest target. It is noteworthy that the average accuracy for the "Above 70%" target return group is still often 2–3 times smaller than for the "Under 0%" and "0% to 9.9%" target return group. The average (highest) returns achievable displayed in Figure 8 follow a similar pattern to those for the average returns by Year-End in terms of the higher magnitude of average returns for the "Above 70%" target return group. The average returns for each target return group and year are positive, highlighting that, on average, stocks during the 12-month period at some point increased over their initial stock price. The correlation between the average Year-Highest The average accuracies (target hit rates) are considerably less variable for the Year-Highest class than for the Year-End class and are also consistently higher in each year (see also Figure 5). The average accuracy ranges from 42.8% (2011) to 95% (in 2020) with an overall average return of 68.1%. The average accuracy for the "Under 0%" target return group is essentially 100% every year given that the stock price is already exceeding the target price at the start. The only exceptions are three observations for which the target return is only 0.2% to 5.1% below the stock price, which drops below it during the first day and never recovers from it. The tendency that lower target return groups are more likely to be met is even stronger for the Year-Highest target. It is noteworthy that the average accuracy for the "Above 70%" target return group is still often 2–3 times smaller than for the "Under 0%" and "0% to 9.9%" target return group. The average (highest) returns achievable displayed in Figure 8 follow a similar pattern to those for the average returns by Year-End in terms of the higher magnitude of average returns for the "Above 70%" target return group. The average returns for each target return group and year are positive, highlighting that, on average, stocks during the 12-month period at some point increased over their initial stock price. The correlation between the average Year-Highest returns with the MSCI world performance is still strongly to moderately positive (0.80, The average accuracies (target hit rates) are considerably less variable for the Year-Highest class than for the Year-End class and are also consistently higher in each year (see also Figure 5). The average accuracy ranges from 42.8% (2011) to 95% (in 2020) with an overall average return of 68.1%. The average accuracy for the "Under 0%" target return group is essentially 100% every year given that the stock price is already exceeding the target price at the start. The only exceptions are three observations for which the target return is only 0.2% to 5.1% below the stock price, which drops below it during the first day and never recovers from it. The tendency that lower target return groups are more likely to be met is even stronger for the Year-Highest target. It is noteworthy that the average accuracy for the "Above 70%" target return group is still often 2–3 times smaller than for the "Under 0%" and "0% to 9.9%" target return group. The average (highest) returns achievable displayed in Figure 8 follow a similar pattern to those for the average returns by Year-End in terms of the higher magnitude of average returns for the "Above 70%" target return group. The average returns for each target return group and year are positive, highlighting that, on average, stocks during the 12-month period at some point increased over their initial stock price. The correlation between the average Year-Highest returns with the MSCI world performance is still strongly to moderately positive (0.80, 0.41 excl. 2020).

returns with the MSCI world performance is still strongly to moderately positive (0.80, 0.41 excl. 2020). The average accuracy and return for the Year-Highest target by target return group is displayed in Table 4. Similar to the Year-End average accuracies, the Year-Highest average accuracies also decline for higher target return groups. Moreover, the trend of higher average returns for higher target return groups can also be observed. Similar to the Year-End average accuracies, the Year-Highest average accuracies also decline for higher 0.41 excl. 2020). The average accuracy and return for the Year-Highest target by target return group is displayed in Table 4. Similar to the Year-End average accuracies, the Year-Highest average accuracies also decline for higher target return groups. Moreover, the trend of higher average returns for higher target return groups can also be observed. Similar to the Year-End average accuracies, the Year-Highest average accuracies also decline for higher target return groups. Moreover, the trend of higher average returns for higher target re-The average accuracy and return for the Year-Highest target by target return group is displayed in Table 4. Similar to the Year-End average accuracies, the Year-Highest average accuracies also decline for higher target return groups. Moreover, the trend of higher average returns for higher target return groups can also be observed. Similar to the Year-End average accuracies, the Year-Highest average accuracies also decline for higher target return groups. Moreover, the trend of higher average returns for higher target return groups can also be observed.

target return groups. Moreover, the trend of higher average returns for higher target re-

turn groups can also be observed.

turn groups can also be observed.


**Table 4.** Average accuracy and return by target return group (Year-Highest class).

Similar to the Year-End average accuracies, the Year-Highest average accuracies also decline for higher target return groups. Moreover, the trend of higher average returns for higher target return groups can also be observed. The average returns for the Year-Highest class are for each target return group higher than those of the Year-End class (see Table 4), which is intuitive given that these correspond to the highest stock price during an entire year and not just those at the end of the year. The same holds true for the average hit returns and the average miss returns, which are all positive (with the single exception of the average miss return for the "Under 0%" target return group which, by definition, cannot be positive). As for the Year-End target, for the Year-Highest target the average hit and miss rates increase as the target return group increases. This highlights that clean energy stocks in the groups with higher mean target returns, which represent a more favorable analyst expectation than groups with lower mean target returns, also tend to achieve higher stock price increases over their 12-month periods. It is noteworthy that both the average as well as the median return increases with higher target return groups, highlighting that the distribution has a longer tail for the high positive returns (see Figure A1 in Appendix A). However, in contrast to the Year-End returns, the share of negative returns remains at a low, close to constant level for all target return groups.

From an investor's perspective, it is interesting to note that the Year-End returns represent the returns achieved by investing in a stock at the time where the mean target price is updated and simply holding it for the 12-month period (passive management). In contrast, the Year-Highest returns embody the highest return accomplishable during the 12-month period starting from the change of the mean target price and, thus, may require extensive monitoring and optimal market timing to be accomplished (active management). This was also pointed out by Bonini et al. [2], who stated that it is effectively not possible for investors to determine when the maximum price (or minimum price) of a stock is accomplished.
