Let’s talk about target prices as part of the investment process. Target prices are projections, expectations, not fact. Again, this is one of those pieces of research information that — if it could be exact — would be the only piece necessary for making a lot of money in any particular stock when investing.
Why is this? Well, if I could guarantee you General Motors was going to hit its target price of, say, $50.00 by the end of 2007, and the stock was trading at $37.00 a share right now, what would you do? Remember, this is a guarantee! Would you not go out and borrow every dollar you could, mortgage your home to the hilt, sell the kids … whatever it takes to raise enough money to buy as many shares of General Motors as possible? Of course you would. Because it’s a guarantee.
“Target” is the operative word here. It is NOT a guarantee and should never be taken as such. It is an attempt on the part of those researchers and analysts who set the target price to come as close as possible to what they think the stock will be trading for by the end of a certain month or quarter or year. (Usually target prices are set in end of month dates or end of year dates.) They sit down with all the information at their fingertips; they ask questions of those in the know at the company; they investigate.
(They make Monk look placid.) They snoop, probe, view paperwork until their eyes cross. That is, if they’re good at what they do.
Then they tell you what they think the price of the stock will be in a year, six months, whatever. There are several Web sites to give you this information, and you can Google “stock target prices” to get even more.
One thing you will notice about the figure of a target price: it varies from one Web site to another, sometimes considerably. This is because the analysts and researchers compiling the information for this figure may not use the same documentation as others and may interpret given information differently. So the best thing to do is compare various Web sites giving you target prices to see which one is more acceptable to you. Sometimes, as a matter of fact, the target price is so outrageous you wonder what the research team was smoking when they put together the information. So it’s best to be conservative. Pick a price target you see as being realistic and reachable, rather than one so far above the current price there would have to be a run on whatever it is the company is providing to reach the target price. (Even the iPhone will eventually stop selling, won’t it?)
Another thing you will notice is most of the sites which give you the target prices do something else most helpful: they give you the range of target prices and then present an average for your consideration. Remember there is a research team assigned to the task of unearthing the target price of a particular stock. These team members do their own research and then come up with individual target prices. On the Web site, then, you will see the lowest target price arrived at and the highest. Those prices are averaged so the third price you see is an average of all those in the mix.
For example, Analyst A thinks the target price of the stock under investigation will be $45.00 by year-end. His target price is the lowest of the five analysts assigned the task of giving the stock a target price. Analyst B, on the other hand, thinks the stock will go to $60.00 by year-end. Quite a difference in stock price, isn’t it?
Which analyst is right? Which target price do you aim for as an investor or a purchaser of this stock? Who is guiding your expectations here?
If you averaged Analyst A’s target price of $45.00 and Analyst B’s price of $60.00, you get $52.50. Usually the Web site will give you this figure, and it’s a good one to use. It is neither too conservative nor too aggressive. Like Goldilocks trying to find the right bed, the right chair, the right amount of porridge, it’s “just right.” Now the only potential problem is if Analyst A is right with his target price, the stock will never get to $52.50, and you should probably have sold. But if Analyst B is correct, when it reaches $52.50/share, you can decide whether you want to hang on until $60.00 and see how accurate he was … or you can sell at a nice profit.
So make target prices a part of your research and see if it helps you pick stock winners!