If you're considering buying a stock in hopes of
selling it later at a profit, one of your top priorities is to
evaluate whether you believe the price will go up or down, and
by how much. Therefore, the analyst's target price is considered
by many investors to be as important or even more important than
the rating.
The target price tells you what the analyst believes
the stock price will be a year from now. It may be a single price
or a range of prices, with an estimated high and low for the period.
Current Price (as of
July 15, 2003)
$25
Target
Price
$35
52-Week
Range
$36-$20
In general, analysts calculate target prices by
estimating earnings for the following year. By multiplying next
year's estimated earnings per share (EPS) by the likely price-to-earnings ratio (P/E), the analyst calculates what the stock
price will be next year if both estimates are accurate.
Pros and cons
You may find target prices a more useful measure
of a stock's potential than ratings, since ratings, by nature,
are generic, across-the-board recommendations that don't take
your particular portfolio needs into account. A target price can
help you calculate whether a stock is worth its current market
price given its estimated future performance. However, target
prices are based on estimates that may not turn out to be accurate.
Furthermore, if your financial needs are more long term, an attractive
target price for next year may not be the best indicator of a
stock's potential for long-term growth.
Sam Stovall,
Chief Investment Strategist at Standard & Poor’s
Sam Stovall, 