What upside potential remains for Iamgold (IAG)? Wall Street analysts estimate 25.9%

Yamgold (IAG) ended the latest trading session at $5.29, up 16.5% over the past four weeks, but the stock could still have plenty of upside potential if short-term price targets set by Wall Street analysts are any guide. The average price target of $6.66 indicates upside potential of 25.9%.

The average estimate includes 10 short-term price targets with a standard deviation of $1.24. While the lowest estimate of $4.63 indicates a price decline of 12.5% from current price levels, the most bullish analyst expects the stock to rise 63.9% to $8.67. It’s important to note the standard deviation here because it helps understand the variability of the estimates. The smaller the standard deviation, the higher the agreement among analysts.

While consensus price targets are widely sought after by investors, the ability and impartiality of analysts in setting price targets has long been questioned. And investors who make investment decisions based solely on this tool may be doing themselves a disservice.

But for IAG, its impressive average price target isn’t the only indicator of potential upside. Strong consensus among analysts regarding the company’s ability to report higher earnings than they had previously forecast reinforces this view. While a positive trend in earnings estimate revisions is not indicative of how much a stock could rise, it has proven effective in predicting growth potential.

According to researchers from several universities around the world, target price is one of many pieces of stock information that is far more likely to mislead investors than guide them. In fact, empirical research shows that price targets set by multiple analysts, regardless of the degree of agreement, rarely indicate where a stock’s price might actually head.

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

They usually do this to increase interest in the shares of companies with which their firms either already do business or are looking to do business. In other words, the business incentives of equity firms often lead to inflated price targets set by analysts.

However, the tight clustering of price targets, which is represented by a low standard deviation, indicates that analysts have a high degree of agreement on the direction and magnitude of the stock’s price movement. While this doesn’t necessarily mean the stock will hit its average price target, it can be a good starting point for further research to identify potential fundamental drivers.