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Aritizia Inc.: Why You Shouldn’t Rely on Price Targets

Aritzia Inc. (TSX:ATZ) has been a tough stock to hold for investors who’d bought the women’s clothing retailer in the months following the IPO. Aritzia is in the risky business of “general fashion” retail, which I believe is one of the riskiest forms of fashion retail.

Aritzia doesn’t specialize in a specific type of fashion, like athletic apparel; it creates many “general” fashions across the board, and such generic fashions tend to go out of fashion as fast as they go in fashion. This fad effect makes Aritzia an incredibly unpredictable stock that could turn the long-term chart into a roller coaster.

But analyst price targets imply a huge amount of upside…

The stock is now down over 23% from the high experienced shortly after the IPO. Many analysts have been extremely optimistic following the company’s IPO, and some of the inflated price targets may have been misleading for investors who were interested in getting a piece of this hot IPO.

As the stock continued to tumble, analyst price target cuts started happening, and investors who blindly followed the price target were left scratching their heads. This is why it’s never a good idea to follow an analyst price target without doing your own research.

Analysts are more qualified though, aren’t they?

Sure, analysts are professionals that know how to analyze a company better than you probably could, but that doesn’t mean that you following a price target is a suitable substitute for rolling up your sleeves and doing the homework yourself.

Part of what makes investing fun is the fact that you, the individual, have to make up your own mind regarding the stocks you want to include in your portfolio. You could pay a professional to actively manage your investments, but if you’re a DIY investor, it’s important to have an investment thesis you firmly believe in.

The real dangers of not doing your own homework

If you’d bought a stock based solely on an analyst price target, you’ll probably be more tempted to sell the stock on any short-term fluctuations in the stock price than if you did all your homework and came up with a solid thesis behind why you think the business will do well in the long run.

Analyst price targets are a great supplement to your own analysis, but following them blindly is just reckless, and you could be steered in the direction of a stock like Aritzia that could be headed off a cliff.

Why were so many analysts bullish?

Aritzia has an intriguing growth plan. It has plans to expand south of the border with about 30 new locations to be opened by 2021. The management team is very creative in the way it spins off its own brands into different stores — something I believe is a smart move.

However, Aritzia is not immune to the pains facing the retail industry, and if an economic downturn happens, things will get extremely ugly, even if the company is successful in its plans for expansion.

I would continue to avoid Aritzia, even though the stock appears cheap right now. Be skeptical of analyst recommendations, and always make sure you do your homework before you buy any stock.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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