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Usually that's the price some analyst has plucked from the air (or their spreadsheet) that represents there view at to what that stock price is likely to be trading at in 12 months (or whatever time-frame they specify) time.
So if you were trading, then that would be your target sell price after buying at the present time I guess (if you were to follow their advice!).
Cheers,
Beej
I always chuckle when I hear or read one of these pie in the sky forecasts, as they never or rarely specify the timeframe in which the price will be realised. Without this, in my view, the forecasts are spurious and meaningless.
Oh Boy where do I start?
Hmm Ok Bhenn. When someone like me is doing analysis on a stock, we will look at the financial circumstances of the business. What does the P&L look like, what's the quality of the Balance Sheet, what the certainty and quality of the cash flows, what the quality of the board of directors, is it a mature business or a growing business, how recession proof are they, what are the core drivers of the business and how are these effected in the current climate and what do we think will happen in the future.
When we've worked all this out we'll do some projections forward, apply the time value of money to discount the future cash flows into current value and then declare the share based upon the current share price a buy hold sell whatever. This is standard value investing. As part of this process we usually come up with a target price or fair value of the business based on all the information we've collected.
Now when we look backwards we can get accurate information (it's all contained in the company reports and is what actually happened), when we look forwards we have to guess, based upon what has previously happened, about what will happen in the future. So when we do that process (and when the companies themselves do that process) it's subjective. This is why you can have two analysts look at the same stock and come up with different recommendations, target prices etc.
That target price is the subjective price that some analyst thinks is fair value. Now Bhenn, ask yourself this....how often do the analysts get it right? Think they have a perfect record? You'll be surprised how often they balls this stuff up. That's why a lot of firms use or talk about consensus figures....which is what a bunch of analysts who cover the same stock think.
It can be of little use however if a stock is running wild on speculation or rumour, fear and greed are powerful motivators of price events.
Bhenn - hope this helps and isn't too confusing
Cheers
Sir O
Time for a practical example I think.
Biotech companies have extremely long lead times to go from idea or concept in a lab to a product on shelf. Takes decades, and whilst a biotech is developing it will burn cash on clinical trials and other expenses. So most of these types of companies have negative cash flow. Most analysts therefore base their recommendation on a discounted cash flow model. X amount of time till product on shelf, x amount of sales in the first year, x amount of license fees, discounted back to present value. Simple eh? Of course during a financial crisis......they have no earnings and they are burning cash. So when times are good they can go well, when times are bad they can stink to high heaven.
Go here.... http://www.avexa.com.au/investor/releases
and look at the research released by ABN Amro on the stock on the 14th of May 09. Then go look at the research in May 07.
In two years the recommendation went from
Buy with a $1.42 target price
to
Buy with a $0.19 cent target price.
Yet both of these models are built on a discounted cash flow methods. Subjective as hell eh? Did you find that a useful guide?
Now if the stock hit's 19 cents, does that mean we should jump like a rabid lemming? Depends on what you think of the stock. If you think that the number of people infected with HIV will increase, that Avexa's research and product has a low side effect profile and is likely to be granted by the FDA once clinical trials are completed and then they will be pulling massive amounts of cash in the future with extremely high cost mark-up and perfect intellectual property protection..... they you might want to consider it a longer term hold.
If you think it's a cash sucking dog in your portfolio and they keep raising funds that constantly dilutes the company value and you want to treat it as a trading position....then you might use that 19 cents as a guide to exit your position.
Clear as glass?
P.S. this is in no way a recommendation for the company AVX. Do not make me bring out the disclaimers. This is clearly an example.
Cheers
Sir O
A proper 'target price' is measurable. Chart patterns have measurable target prices. There's many different ways to calculate a 'target price' or 'target zone'. Fibonacci expansion ratios, Elliot Waves, Gann, Swing Rule etc.
And then there's the fundamentals....
Thanks Sir O, I tip my hat to you.
Yes, it was helpful.
Inherently, behind an analysts target price is context and subjectivity, with stock specific research the key to minimise risk.
Does anyone else watch "Your Money, Your Call" or anything like that? I think I might follow some of the stocks they recommend on there for a while and see how they generally do. Like I said, I haven't taken up one of their recommendations yet but was good to clarify what they mean by it (target price).
Thanks everyone.
What is meant by target price?
- Thread starter Bhenn
- Start date
Usually that's the price some analyst has plucked from the air (or their spreadsheet) that represents there view at to what that stock price is likely to be trading at in 12 months (or whatever time-frame they specify) time.
So if you were trading, then that would be your target sell price after buying at the present time I guess (if you were to follow their advice!).
Cheers,
Beej
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I always chuckle when I hear or read one of these pie in the sky forecasts, as they never or rarely specify the timeframe in which the price will be realised. Without this, in my view, the forecasts are spurious and meaningless.
Sean K
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No, they probably have sold by the time it reaches their target price.
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Oh Boy where do I start?
Hmm Ok Bhenn. When someone like me is doing analysis on a stock, we will look at the financial circumstances of the business. What does the P&L look like, what's the quality of the Balance Sheet, what the certainty and quality of the cash flows, what the quality of the board of directors, is it a mature business or a growing business, how recession proof are they, what are the core drivers of the business and how are these effected in the current climate and what do we think will happen in the future.
When we've worked all this out we'll do some projections forward, apply the time value of money to discount the future cash flows into current value and then declare the share based upon the current share price a buy hold sell whatever. This is standard value investing. As part of this process we usually come up with a target price or fair value of the business based on all the information we've collected.
Now when we look backwards we can get accurate information (it's all contained in the company reports and is what actually happened), when we look forwards we have to guess, based upon what has previously happened, about what will happen in the future. So when we do that process (and when the companies themselves do that process) it's subjective. This is why you can have two analysts look at the same stock and come up with different recommendations, target prices etc.
That target price is the subjective price that some analyst thinks is fair value. Now Bhenn, ask yourself this....how often do the analysts get it right? Think they have a perfect record? You'll be surprised how often they balls this stuff up. That's why a lot of firms use or talk about consensus figures....which is what a bunch of analysts who cover the same stock think.
It can be of little use however if a stock is running wild on speculation or rumour, fear and greed are powerful motivators of price events.
Bhenn - hope this helps and isn't too confusing
Cheers
Sir O
skc
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Great answer Osis.
Many target prices have some sort of declaration, like based on long term copper price of $X or AUD/USD rate of Y. These can have huge influences on the business you are looking at. So if you are looking at the target price you need to think about whether you agree / accept these input parameters as well.
Get's complicated very quickly.
Many target prices have some sort of declaration, like based on long term copper price of $X or AUD/USD rate of Y. These can have huge influences on the business you are looking at. So if you are looking at the target price you need to think about whether you agree / accept these input parameters as well.
Get's complicated very quickly.
Ok thanks everyone for your help.
To summarise what has been said, a target price is a prediction, based on past events that shouldn't necessarily be taken as gospel. In essence, it is one analysts, or one organisations view as to where a company could get to from where it is at a particular point in time. Therefore, upon conducting one's own research, or seeking further opinions, it is a guide to the potential sell price of a stock...
right track?
All in all I think what I have gained from this is not to get uber-excited every time I see a stock that's tipped to sky-rocket hehe.
To summarise what has been said, a target price is a prediction, based on past events that shouldn't necessarily be taken as gospel. In essence, it is one analysts, or one organisations view as to where a company could get to from where it is at a particular point in time. Therefore, upon conducting one's own research, or seeking further opinions, it is a guide to the potential sell price of a stock...
right track?
All in all I think what I have gained from this is not to get uber-excited every time I see a stock that's tipped to sky-rocket hehe.
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Time for a practical example I think.
Biotech companies have extremely long lead times to go from idea or concept in a lab to a product on shelf. Takes decades, and whilst a biotech is developing it will burn cash on clinical trials and other expenses. So most of these types of companies have negative cash flow. Most analysts therefore base their recommendation on a discounted cash flow model. X amount of time till product on shelf, x amount of sales in the first year, x amount of license fees, discounted back to present value. Simple eh? Of course during a financial crisis......they have no earnings and they are burning cash. So when times are good they can go well, when times are bad they can stink to high heaven.
Go here.... http://www.avexa.com.au/investor/releases
and look at the research released by ABN Amro on the stock on the 14th of May 09. Then go look at the research in May 07.
In two years the recommendation went from
Buy with a $1.42 target price
to
Buy with a $0.19 cent target price.
Yet both of these models are built on a discounted cash flow methods. Subjective as hell eh? Did you find that a useful guide?
Now if the stock hit's 19 cents, does that mean we should jump like a rabid lemming? Depends on what you think of the stock. If you think that the number of people infected with HIV will increase, that Avexa's research and product has a low side effect profile and is likely to be granted by the FDA once clinical trials are completed and then they will be pulling massive amounts of cash in the future with extremely high cost mark-up and perfect intellectual property protection..... they you might want to consider it a longer term hold.
If you think it's a cash sucking dog in your portfolio and they keep raising funds that constantly dilutes the company value and you want to treat it as a trading position....then you might use that 19 cents as a guide to exit your position.
Clear as glass?
P.S. this is in no way a recommendation for the company AVX. Do not make me bring out the disclaimers. This is clearly an example.
Cheers
Sir O
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A proper 'target price' is measurable. Chart patterns have measurable target prices. There's many different ways to calculate a 'target price' or 'target zone'. Fibonacci expansion ratios, Elliot Waves, Gann, Swing Rule etc.
And then there's the fundamentals....
Thanks Sir O, I tip my hat to you.
Yes, it was helpful.
Inherently, behind an analysts target price is context and subjectivity, with stock specific research the key to minimise risk.
Does anyone else watch "Your Money, Your Call" or anything like that? I think I might follow some of the stocks they recommend on there for a while and see how they generally do. Like I said, I haven't taken up one of their recommendations yet but was good to clarify what they mean by it (target price).
Thanks everyone.