In analyzing how much room a given stock has to run relative to its current level, a number of tools are available to investors. One such tool is the use of target prices, whether derived from analyst projections or from one’s own financial model.
I’ve been a big believer in using target prices to set appropriate expectations of near-term performance, and re0assessing a portfolio of stocks on a regular basis (annual or otherwise) adjusting positions as necessary along the way.
Using target prices is a great way investors can glean important information as to how overvalued or undervalued a given company’s stock may be at a point in time. Knowing what one believes to be the “fair value” of a stock at a certain snapshot in time can also show what sort of sentiment the overall market holds with respect to the future earnings and cash flow generation capabilities of a particular company in contrast to one’s own.
With this in mind, it’s important to remember that the stock market does often swing violently from a sentiment standpoint, a reality that results in mispricing opportunities from time to time.
When one sees a stock that is too unloved by the market or not appreciated enough, ones target price can assist in determining the magnitude of the sentiment differential one has with the market; if such an undervalued stock is a high-conviction pick, investing in the short-term and staying patient in the long-term is a great way to build wealth over a long period of time.
Invest wisely, my friends.
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