How Price Targets are Used to Manipulate Stocks

Have you ever woken up to find your stock has been downgraded by what appears to be a reputable organization like a major bank?

This happens every trading day, but you shouldn’t let it affect you. (Probably.)

In this article we’ll examine the three main parts of a price target change, and how you can analyze them to make better investing decisions.

1. Price Target

2. Issuer

3. Reasoning

Here is an example of a real headline:

Friday April 3rd, 2020. Goldman Sachs Downgrades Immunomedics to Sell, Announces $5 Price Target.

This price target was issued by analyst Paul Choi. His previous price target for $IMMU was $24.

On Thursday April 2nd, the price for Immunomedics closed at $10.65. But on Friday, after Paul issued his $5 price target, the stock dropped 11.83% to close at $9.39.

An 11.83% drop is significant. This might cause a lot of people to panic. They see almost 12% of their money going up in flames, and think, “If this actually hits $5 then I’m ruined.” So they sell. Volume on April 3rd was three times higher than normal. Many investors sold and would soon regret it.

The reasoning for Paul Choi’s price target slash was that the FDA found some quality control issues in one of Immunomedics’ manufacturing sites. While this is a cause for concern for a company that makes medicine, slashing a price target by 81% is criminally excessive.

How badly were small investors tricked?

On Monday April 6th, exactly one trading day after Choi’s garbage price target was issued, Immunomedics issued a press release saying they had stopped a breast cancer trial early because the data was amazing. The stock closed at $18.75, up 99.68%.

Wall Street’s scam tactics are not always this transparent. Price target manipulation happens on a smaller scale every trading day.

So now let’s look at the three parts of price target manipulation and how we can avoid being tricked in the future. Because if Wall Street is not held accountable for these fraudulent actions, they will continue.

1.  Price Target

The Immunomedics price target was changed from $24 to $5. This is a gap of $19 or 81%. That was a huge difference and made it more obvious that this price target change was a scam. Whenever a bank issues a price target, look for the gap. How big is it? The bigger the gap, the higher the chance of fraud.

Wall Street wanted to own as much of Immunomedics as possible. Big money grabbed an extra six million shares for a profit of $113 million. Not bad for a single black mark on Paul Choi’s record.

2.  Issuer

Who issued the price target? Was it an investment bank like Gold Sachs or Morgan Stanley? Does the price target issuer make their own trades? Does the issuer report trading profits every quarter? If yes, then the price target is more likely to be a scam.

Trading is a zero-sum game. For every winner, there is a loser. Every quarter, investment banks like Goldman Sachs and Morgan Staley report billions in trading profits. Instead of “trading profits” you should think, “Money stolen from small investors through stock manipulation techniques like stop-loss raids and fake price targets.”

Yes, some of their profits will be made through good investment decisions. But not all of it. The supply of good companies that make huge gains every quarter is small. In order to maintain a constant stream of “trading profits” Wall Street must resort to stock manipulation. Every quarter these “traders” are under pressure to meet or beat last quarter’s earnings. It’s no surprise that stock manipulation is getting worse every year. If it doesn’t, then “trading profits” won’t keep going up.

When a bank issues a drastically lower price target on weak reasoning, I assume they’re trying to make money shorting the stock or are trying to get the price low enough so either they or their clients can get a good entry point.

3.  Reasoning

What was the reason for the price target change? If the analyst’s reason causes you to say, “Wow, what a bunch of bullshit,” then you might be on to something.

There are good reasons for a drastic price target change and there are bad reasons. In the world of biotech, if a company fails a drug trial, that would be a good reason to downgrade a stock. It’s solid evidence that this company will earn less money in the future.

In the case of Immunomedics, a quality control issue was not a good reason. This is because a quality control issue can be fixed. A failed trial cannot.

So, when an analyst issues a price target downgrade on your stock, just imagine your company is biotech start-up with a phase 2/3 trial in progress. Where on the reasoning spectrum does your news fall? Is it closer to a failed trial, or a quality control issue?

If it’s a minor issue, then we can expect the stock to recover. If it’s a major issue then you might want to consider selling and moving on. Especially if your thesis was, “This company is going to make billions because their new drug is amazing.” Since the trial has failed and the new drug is garbage, this is a good reason to sell.

Finding hair on your hamburger is gross, but it’s not a good reason to short McDonald’s.

Small issues can be fixed. Major issues maybe not.

Why does Wall Street issue these fake price targets?

Because they’re effective. They use a psychological manipulation technique called anchoring. This is when you feed someone information and their brain subconsciously references it when making decisions. Unless you are aware of anchoring, you have no control over this. You are not immune to it.

Have you ever seen a product on sale and the price tag said: $50, original price $100? That’s anchoring. Your brain is tricked into believing that it’s a good deal. Even though the price might have never been $100.

Here is a simple way to test the effectiveness of the anchoring technique. You’ll need two friends that aren’t within earshot of each other, and a slightly obscure dead celebrity.

Let’s use the King of Rock ‘n’ Roll.

Ask your first friend, “Do you think Elvis was younger or older than 80 when he died?” After they choose, ask them, “How old do you think he was?”

Write that number down.

Now ask your second friend, “Do you think Elvis was younger or older than 45 when he died?” Again, after they’ve chosen between younger or older, ask them, “How old do you think he was when he died?”

This is the magic of the anchoring effect. Your first friend is more likely to pick a number closer to 80, whereas your second friend is more likely to pick a number closer to 45. This isn’t because they’re dumb, it’s because they only frame of reference they have is the numbers you gave them.

This is what happens with price targets. Most small investors don’t do a ton of research when they buy a stock. It might be a recommendation from a friend, or maybe they got a stock tip from YouTube or TikTok. Regardless of why they bought it, a price target change causes them to question whether this stock is a good deal.

Their old frame of reference was “Buy this stock because it’s going to the Moon.” This has now been replaced with, “Sell this stock because it’s going to $5.”

Some amount of people fall victim to this every day. Wall Street has been stealing money from small investors for decades and it must stop. As a society, we don’t need them. Their “trading profit” is our hard-earned money. Although technically, they didn’t steal it. They just tricked you into giving it to them.

As it stands, it’s completely legal for Wall Street to issue a downgrade, and then buy up the stock once it crashes. All they have to say is, “It was a bad deal at $15, but it’s a great deal at $5.” Never mind it was them that nuked it from 15 to 5.

While this article is focused on downgrades, all of this is true in reverse. Wall Street often pumps a stock with fake price targets that are way above the current price. They do this so you’ll buy in and then Wall Street can unload their position on you, because they know you’ll hold it until it becomes profitable. Which might never happen.

Until it’s illegal for banks with trading profits to issue price targets we must treat them with extreme prejudice.

Good luck with your investing and don’t forget to follow us on Twitter for more news and in-depth analysis.

(Disclaimer: This post does not constitute financial advice. Do your own due diligence before making an investment.)