So, have you spent time seeking out some of the research vehicles we’ve talked about in recent weeks? I hope so. And, I hope you’re now fairly comfortable with where to go when you want to figure out which stock to buy.
Now that you know where to go when you want to do research, we’re going to spend some weeks talking about the actual research itself!
There are so many different pieces of the puzzle for picking good stocks. With such diversity in mathematical and financial figures, there is a tremendous universe of information that can help you decide to buy Stock A over Stock B. If you aren’t careful, your head will spin right off your body! That’s how much material is out there, that’s how confusing it can be.
So I’m going to walk you through some of the more basic, yet informative, pieces of information. I must confess to you that math and I are not intimate; were it not for the invention of the calculator and the aid of my husband, my success in the stock market would be jeopardized, and I’d be writing the movie review for TheSavvyGal.com instead. So when I tell you that these research bits are easy to comprehend, I’m not kidding. I believe you can pick good stocks — i.e., the ones that go up! — without being an Albert Einstein in the math world.
Today we’re going to talk about something very simple to understand: target price. Analysts who cover particular stocks do all the mathematical work for you and come up with what they estimate (remember that these are not foolproof but estimates only) as a target price for Stock A.
They will also give you the timeframe for that stock to hit that target. Then Web sites, like the ones we’ve mentioned in past articles (see the last 2 articles), offer the information to their clientele: e.g., you. And there will be a percentage of growth (or loss) attached to that price in dollars. Very handy. And, it’s very easy to understand to use as a possibility regarding buying a particular stock.
What these Web sites also do for you is to average the target price from all the analysts who cover the particular stock at which you’re looking. So if there are, say, ten analysts who cover Stock A, and their target price for the end of 2007 varies from $50.00/share to $60.00/share, the Web site will give you the average target price as $55.00/share. You will then know that there are analysts who have a higher target price and analysts who have a lower one.
This is a great piece of information to have. If the stock you’re looking at in February of 2007 is at $40.00/share and the target price average of analysts is $50.00, this tells you that the expectation is that the stock price per share will go up $10.00, or a 25 percent increase. (I told you a calculator and a husband come in handy.) Now, if you had a fair degree of certainty that the analysts are correct in their assumptions, would you be satisfied with a particular stock that went up 25 percent in one year?
Probably yes. Unless you’re really into speculation and aggressive investing that can net you triple digit gains from the stocks in your portfolio. (And if so, you should be young enough to be able to recoup the losses if you’re wrong in your picks.)
A 25 percent gain in a stock is nothing to shake a stick at. And by knowing the target price of the stock as noted by various analysts who make it their business to know the stock in question, you can make a more intelligent decision as to whether or not to buy this particular stock.
Remember, though, as with any research pieces of information, they are not guaranteed. These are someone’s (hopefully) intelligent assessment based on a gathering of good information and their own research. You are relying on these analysts to provide you with something to think about and put into the mix of your decisions regarding your stock portfolio.
I have also found it helpful to check target prices on various Web sites to make sure that there is some measure of agreement on the figures. And, I check the target price link quite often on the stocks I own, because it is subject to change if new information becomes available to the analyst. So at least once a week I check all my stocks through the grid of their target prices to see if I want to make any adjustments based on the adjustments in the target price. It’s easy to do and gives you a focus and some peace of mind that you might not otherwise have.