How do you establish a target price on a stock?

[stevenmac2]

Hi,

Can someone share your techniques with examples (show screenshot if using chart) on how I can establish a target price for a stock? How do you know what is the potential price of that stock? What methods do you use to determine this?

Thanks,
Steven

[aquaswim47]

There's no specific formula to deciding whether a stock has hit a target price. That said, you can ask yourself whether a stock's price is reasonable based on whether its market capitilzation is justified by its balance sheet and its level of growth. If you see cash flow from OA growing that is a great sign that the business is taking in cash from customers and able to invest in PPE or R&D. I really like seeing strong companies. I tend to love stocks with a PE ratio of between 8 and 16 or that have a PE that is less than 1.75x its growth rate.

In terms of technical analysis, I look at a stock's volatility history and try to buy at a satisfying price; a price that is near the bottom. If I'm shorting a stock against another stock or shorting an index, I'm less concerned about price than if I hold a long position in the stock.

[investoid]

If you want to learn about several valuation methods and how to use them in equity analysis, check out Fire Your Stock Analyst.Another decent book, although I like its valuation methods less, is Applied equity analysis.

[aquaswim47]

Nice articles, Investoid. I enjoyed reading them. Isn't it difficult to follow EMT though if you follow the advice from "Fire Your Stock Analyst: Analyzing Stocks on Your Own?" I think using that for 10-15% of your portfolio could be advisable and 85-90% of your portfolio should be passively invested in an index fund. That's because you only have a 15% chance of beating the market. We'll I've been in the top 10% of everything in my life so I hope that 15% of my proceeds beats the index fund portion.

I think looking at the local media hubs is a great idea since it will take a long time to reach the national or international press. I also think it is good to invest locally because you may be able to arrange for a tour of the company and realize that they sell a great product that you presume will be profitable. I think if the stock price is at least $3 and it has little analyst coverage, such a stock can be worth buying. You're going to get above average returns with less risk than someone investing in penny stocks (since that person is less likely to know about a company other than what's on its website). You might be able to meet management (claiming you would like to do an informational interview for a college project) and see if they're worth investing in.

I'll really excited about the opportunities the 9% drop could eventually create; the 1987 crash provided opportunities for the 1990's. The emerging markets are another example of irrational exuberance. I think the US market will decline 2% today and drop a total of 8-12% by May.

[investoid]

aquaswim - Yes I agree that active investing should only be a small part of your portfolio.

I am also waiting to see if this drop is just a flash in the pan or if the drop will continue for several months.

[aquaswim47]

Well, we all hope that this is it. I'm hoping that today and tomorrow will be at least half the total decline (5% decline versus a 8-12% total decline). A 10% decline would be nice (over a 2 month period) giving us all time to get more into the market. Most likely, tomorrow's Dow will fall a "meager" 200-250. I'm hoping this cascade finishes by May with the Dow at least 11,379. I plan to average in the market. With $650, I plan to invest another $250 tomorrow in a good mutual fund (now 1% + YTD, probably negative by tomorrow). I'll really like that move, since it means getting it cheaper. My JNJ held up pretty well. Maybe I should have shorted the market, but come Thursday or Friday, I probably would have to sell Proshare Funds since the market would rebound. No regrets, I've got enough downside protection and that's all I need. No need getting greedy.