Does Academy Sports and Outdoors, Inc. (ASO) have the potential to rally 33% as Wall Street analysts expect?

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Sports and Outdoors Academy, Inc. (ASO) closed the last trading session at $38.81, gaining 20.9% over the past four weeks, but there could be plenty of upside potential in the stock if short-term price targets set by Wall Street analysts are a guide. The average price target of $51.75 indicates upside potential of 33.3%.

The average comprises eight short-term price targets ranging from a low of $45 to a high of $60, with a standard deviation of $4.86. While the lower estimate points to a 16% increase from the current price level, the more optimistic estimate points to a 54.6% increase. More than the range, the standard deviation should be noted here, as it helps to understand the variability of the estimates. The smaller the standard deviation, the greater the agreement between analysts.

While the consensus price target is highly sought after by investors, the ability and fairness of analysts to set price targets has long been questionable. And investors making investment decisions solely based on this tool would undoubtedly be doing themselves a disservice.

However, an impressive consensus price target is not the only factor that indicates a potential rise in ASO. This view is reinforced by analysts’ agreement that the company will report better earnings than they had previously estimated. While a positive trend in earnings estimate revisions doesn’t give any indication of the magnitude of the stock’s potential upside, it has proven effective in predicting a rise.

Here’s what you need to know about analyst price targets

According to researchers from several universities around the world, a price target is one of many pieces of information about a stock that misleads investors far more often than it guides them. In fact, empirical research shows that price targets set by many analysts, regardless of the degree of agreement, rarely indicate where a stock’s price might actually be headed.

While Wall Street analysts have a deep understanding of a company’s fundamentals and how sensitive its business is to economic and industry issues, many of them tend to set price targets that are overly optimistic. You wonder why ?

They typically do this to generate interest in the stocks of companies that their companies have existing business relationships with or are seeking to partner with. In other words, trading incentives from companies covering a stock often result in inflated price targets set by analysts.

However, a tight grouping 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. Although this does not necessarily mean that the stock will reach the average price target, it could be a good starting point for further research aimed at identifying potential fundamental driving forces.

That said, while investors shouldn’t ignore price targets entirely, making an investment decision based solely on them could result in a disappointing return on investment. Thus, price targets should always be treated with a high degree of skepticism.

Here’s why there could be a lot of benefits in ASO

Analysts’ growing optimism about the company’s earnings outlook, as indicated by the strong agreement among them to revise EPS estimates upwards, could be a legitimate reason to expect the stock to rise. Indeed, empirical research shows a strong correlation between trends in earnings estimate revisions and short-term stock price movements.

For the current year, four estimates have increased in the last 30 days compared to no negative revision. As a result, the Zacks consensus estimate increased by 11.8%.

Additionally, ASO currently has a Zacks #2 (buy) rating, meaning it’s in the top 20% of more than 4,000 stocks we rank based on four factors related to earnings estimates. Given an impressive externally audited track record, this is a more conclusive indication of the stock’s upside potential in the near term. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, while the consensus price target may not be a reliable indicator of what the ASO might gain, the direction of price movement it implies seems to be a good guide.

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