Stock Analysis: What Is a Price Target?
An analyst's stock recommendation may contain a price target -- the price that the analyst believes the stock can command based on his analysis. Since most stock recommendations are bullish -- i.e., they recommend buying rather than selling stocks -- a price target in most instances is above the current market stock price. The difference implies the upside potential if an investor were to buy now.
Other People Are Reading
-
Valuation Models
-
Many analysts use stock valuation models in their analyses. A valuation model is based on certain parameters and assumptions. Parameters may include balance sheet data and current earnings, as well as assumptions -- future earnings estimates and sales/earnings multiples. After all the numbers are plugged in, the model is supposed to project a future stock price, usually going out six or 12 months. If the projected stock price is above the current stock price, the stock represents a good profit potential and an analyst may issue a buy recommendation with the projected future stock price as the price target.
Problems With Assumptions
-
The problem with assumptions is just that: they are assumptions. They may be incomplete, incorrect, or change with incoming information. If a price target is issued and the assumptions change, the price target should change also.
-
Trusting Price Targets
-
Should you use analyst price targets when buying and selling stocks? It depends on the analyst. As in any profession, some analysts are better than others. Some analysts are highly regarded by the investment community because their calls are pretty accurate; when they issue a buy recommendation with a price target, investors take notice and follow their recommendation. Other analysts have poor records and their calls are either mediocre or manipulative, so investors tend to disregard them.
Self-Fulfilling Prophesy
-
Price targets are popular because they motivate investors to act by giving them a profit potential. They often become a self-fulfilling prophesy: a stock with a price target of $50 can get to $50 simply because everyone expects it to get to $50, not because the stock is worth $50.
Manipulation
-
Price anchoring is an old trick often used by manipulators. If they want to increase a stock price, they can come out with a price target so that other investors will start buying the stock on the expectation that the stock price will hit its target. In the meantime, the manipulators sell their holdings into the buying generated by issuing the price target.
-
