So I have limited experience with investing in securities. However, there’s this small cap company I’m looking at that is trading at about $25. The average price target is about $40. Based on my limited research, that’s the number the firm believes the stock will be at in one year. That’s a 60% increase.
There are firms that are showing the price target of $40 and a “sell” recommendation. I looked at some of their buy recommendations on other stocks and some of them have price targets that are about the same as the current stock price (and the stock price hasn’t materially changed since the recommendation came out).
How can a single company that believes the price will increase 60% in a year recommend selling the stock while they recommend buying a stock that has an estimated price increase of less than 5%. I get that this is a small cap company so they aren’t paying as much attention to it, but shouldn’t the numbers at least be internally consistent?
And don’t worry, I’m not looking to trade this stock, just want to understand what may be going on here and what piece of the puzzle I’m missing.
The cynic in me says that the recommendation to sell is a trigger to drive the price down so their big customers can actually buy–then they can come out with a new analysis with a buy rating and cause the stock to pop which is actually a trigger to sell.
The amateur DT in me says that it makes perfect sense to say Sell and set a 6 month target of $40. Technicals can show pressure on a stock and until you see those technicals reverse you might not recommend buying. A very cheap/dirty example would be if a stock is trading below its SMA, you’d recommend to wait until that trend reverses. While you agree the value is there, you are waiting for a trigger to go long on the stock.
A less technical example would be if there was some news like a CEO quitting or some lawsuit pending (VW). Until that has a resolution they wouldn’t recommend buying in the short term.
As the stock starts rising they will adjust the target cutting that number back, or raising it. So you’ll have someone reaffirm the buy and then cut their target to $55 and that spooks people. Or they’ll increase the target to $70 and the stock will pop up. Same stock, same company, but the herd moves and you win/lose.
Edit to add: all of this is why I don’t trade individual securities much anymore.
Price targets from stock analysts are basically worthless. You’ll do fine to just ignore them. Sometimes, after the stock has gone way up, they’ll raise their target, or after it has some fraud and crashed 90%, they’ll cut it to Sell and a low target. Kinda like the credit rating agencies giving out AAA’s to all those mortgage loans before they all blew up in 2007-2008.
Let me give you the best advice you will ever get regarding investing. Don’t buy individual securities. It’s a suckers game. Bogleheads will tell you to build your own portfolio of low fee index funds. Horizon funds are nice, as well as easy.
You are far better off spending your energy on finding ways to make, as well as save more money and then get it into those funds. It has been demonstrated time and time again that no one consistently beats the S&P 500, though not for the lack of trying.
Your suggestion is true when compared to ordinary individuals stocks and when market condition is bearish or flat. But the current market condition requires better strategy than parking investment funds in a low fee index funds. Past 2 years, my TANGFAN have blown away all low fee index funds …even SP500. What’s TANFANG? It’s my portfolio of individual stocks that I’ ve researched to beat SP500. It consists of Tesla, Apple, Nvidia, Facebook, Amazon, NetFlix, and Google. In a current bull market, TANGFAN will beat any low fee index funds by a wide margin.
Is it safe? Of course not! They are high risk stocks that will lead the decline in a bear market. But we are in a bull market that will continue under the current condition. As long as unemployment stays low and job growth continues, I can see the current bullish trend continue into 2018.So not having investments in TANGFANG is a loss of a great opportunity in this bullish market.
Buy TANGFAN now? Best to wait for at least 5% correction from it’s 52 week high. Good examples GOOGL. Google was trading above $990 when EU fined Google. This news caused GOOGL to dip below $930. So buying after a minor dip does pay off!
I wouldn’t recommend anyone to invest all of their investment fund into TANGFAN. But 25% of your portfolio, should be in aggressive stocks in a bull market (will need to reduce during a bear market). Last year, my individual stocks returned about 40% gain. This year, I am up above 50% so far ( I decided to become more aggressive and started to do call options… wouldn’t recommend for newbies).
Good luck! Remember, nothing goes up forever! So learn to take some profit near the 52 week high and buy back again when it has a minor correction. High growth stocks will continue to set new 52 week highs in a bull market (but there will be minor hiccups on the way).
Thanks. I don’t really buy into that theory of investing. On the other hand, I generally don’t invest in individual securities because I don’t understand the intricacies of how the market works and I’m competing against people who do.understand the systems and options for hedging, etc. And I agree that the amount of time it would take to learn these things is not worth it for me right now given my current situation.
But as I said, I’m just trying to understand how this works. Not for the purpose of investing myself, but only to have a baseline understanding of the market which I think is helpful for anyone even if you aren’t invested.
Yes, I guess I’d say small to mid cap (there’s only 3 that I saw). Definitely not blue chip stocks.
Interesting. So I guess that analyst’s price target may not take into account the very rare, but possible death nail, while the buy/hold/sell will take it into account because we’ll know shortly whether the stock will crash or not, and if it doesn’t crash, the analyst thinks it’ll go up to $40. Am I sort of on track here?
That makes sense, but shouldn’t they at least be internally consistent within the same analyst company? If they’re involved in shenanigans and trying to get the stock price to go down, why set the price target so high? Or the reverse.
Asking for consistency is way more than they get paid for. My understanding is that the real money comes from the underwriting side business (helping the company sell stock or bonds). I’ve seen them upgrade a stock (which moves it up because at least some people believe them), and two weeks later they help them sell a bunch of cheap new stock that tanks the price. Really bad for anyone who bought on their price recommendation. Of course there are Chinese walls, sure…
This is exactly the sort of stuff brokers tell people, and with all due respect it’s hogwash. One can find all sorts of funds that outperform the S&P over a few years. None of them do it consistently. Every year you can find a list of funds that crushed the S&P. Every year it’s a different set of funds. Maybe one or two of them pull off even five years in a row. But none of them outperform a lost cost indexed fund over a long-term period. What makes you think you can beat it?
We were interviewing financial advisors and my wife asked him why he got into management investing and he looked up at the ceiling and smiled and said, “it’s lucrative”. Yeah, no thank you. I’m not putting my money with someone whose interest is making commissions on trades that cost me money.
I have to respectfully disagree. If one does his/her homework, experienced investors can make adjustments on his portfolio to easily beat an index fund. But if one does not know much about investing, then it’s better to buy a low fee index fund rather than throw a dart to select individual stocks. Online trading has changed the dynamics of investing. It’s no longer about holding a good stock forever. Look at GE, it was once a great stock to own. But the world around GE has changed and this giant fell asleep. Unfortunately, SP500 index has GE and many sleeping giant companies. So far GE has dropped from around $31.61 (Jan 2, 2017) to current price of $22.98. By buying low cost index fund, investors don’t have a choice to remove GE from the fund. However, individual stock portfolio can give an investor the option to select good performing stocks from SP500 and avoid a dog stock like GE. With experience and diligent research, educated investor can do much better than an index fund that has no management and adjustment.
There is nothing wrong with investing in a low cost index fund. But putting all investment money into an index fund is going to cost an opportunity to beat SP500. In this market condition, almost anyone with little financial sense can beat SP500. For example, let’s say someone picks one good stock from each sector…AAPL for technology, JPM for financial, HD for retailer, etc. Portfolio of these great stocks will easily beat low cost index fund by more than 20%.
So to invest all in a low cost index fund to save little money on commission is actually causing a great unrealized loss. Only a sucker will think saving money on a commission is actually a gain. Sometimes, being cheap to save few dollars here and there will actually cost the opportunity for a greater return.
No one can beat the S&P 500 over a long term period. You’re claiming people can with no evidence. If you did have evidence people would be knocking down your door. This is even more true now with algorithims handling transactions. It’s a waste on so many levels.
I think that’s overstating the bull case, in terms of how difficult it is to outperform consistently. “just pick a good stock” - easier said than done, although in a market where almost everything is going up, many things will go up more than the index average and leave their fans feeling like experts instead of just winners.
I think that’s overstating the bear case. I could certainly beat the S&P for years with a high probability, but in some dumb way that involved taking risks that were very unlikely and just hoping they wouldn’t show up. There are other ways involving cost minimization or avoiding certain troubled individual stocks that are also feasible and pretty clearly wins, but unlikely to make more than 0.1% difference. Small gains can be easy, big gains much harder.
That said, Buffet is a good example of someone who’s beat the market for decades and by a fair margin. There are other top hedge fund traders with similar records of multiple decades of outperformance. Are they all just lucky and the next year they could blow up? I guess we can’t really tell, but that view seems implausible to me.
I didn’t say anyone can beat SP500 consistently over a long period. I said “in this market condition” picking a good stock from each sector will give better return than an index fund since individual stock portfolio’s performance is not averaged down by laggards such as GE. If it’s that easy, why would anyone buy an index fund?
I have started investing since 1997 with mutual funds and gradually transitioned into individual stocks in 2010. My first purchase was AAPL. I made mistakes along the way but eventually learned 3 years ago that stocks that’s likely to be in heavy demand by consumers will perform than a legacy company like GE. For past 2 years, I beat SP500 by a wide margin. And this year, my portfolio is up more than 48% thanks to TANGFAN I invested from 3 years ago. I am not saying that this will happen over the long period. However, you have to be blind not to be able to see the bullish condition for TANGFAN. When market condition changes, TANGFAN will underperform SP500. My point is that investment strategy needs to be adjusted based on the market conditions. Simply parking all investment money in a low fee index fund is a missed opportunity at current market condition.
I agree. Investing in BRK.b will result in better return than a low cost index fund. But I do worry that if something happens to Warren Buffet, then BRK.b may take a hit.
Professionals can’t time markets, what makes you think you can? Even before the internet, I’ve seen and heard people brag about a particular trade or strategy. You only hear about when people do well.
Talking bout strategies makes neophytes wonder, “Why can I do this myself? I don’t want to get left behind.” Your strategy is almost certain to lag behind the S&P over a 10 year period. And “market conditions” is just gobblegook. Even under a volitale market you shouldn’t be making many trades.
For those that don’t have the time or knowledge (which in the later is pretty much everyone) you are far better off investing all of your money into a “horizon retirement date” fund. If you want a bit more tailoring and some hand holding, Vanguard investment robo-advisers charges %.3 which is a lot better than the 1% the typical manager charges. And there is little risk they are going to churn you.
Nobody can time the market and always trade at the right moment. Not even the oracle of Omaha. But if you follow your stocks and observe the trading range, you can get an idea when stocks are overbought or oversold. It’s never going to be perfect timing, but the pattern has high chance of repeating.Look at GOOGL, see how many times it has gone back to $930 after it has traded above $990. I can remember it doing this pattern at least 3 times within past 12 months. By observing this pattern, an investor can buy GOOGL when it dips near $930 and sell above $990. Going forward, the range may change to $950 buy and sell above $1020. I don’t recommend that all shares be traded. I would keep at least 50% as a long term and the other remaining as a trading position. In a bull market, this trading pattern has worked well. But when a market turns bearish, then strategy needs to change.
Good stocks will always rebound well. So even in a bearish market, averaging down the cost basis of good earning company like Apple will pay off when market gets out of slump.
Investing all of money into index fund or managed mutual funds (with few exceptions) is like a runner trying to run with an opened parachute tied to his body. Investor should be allocating 25% into TANGFAN and sprint in this bull market. If investor crawl in this bull market, he is actually losing earning potential. But I understand some people either don’t have a tolerance for risk or some people just don’t want to consider another option due to lack of understanding. If that’s case, it will be better to run slowly with a parachute rather than run beyond the speed one can handle and fall flat on his face. Since everyone has different capacity, don’t ever say nobody can’t time the market or beat SP500. Warren Buffet has timed perfectly to invest in GS and BAC. The special preferred stocks he got was due to a perfect timing. History has shown that he has gotten more right than wrong because he understands the market. It would be better to invest in BRK.b than any low commission funds from Vanguard.
Past performance is not an indication of future performance. You seem to think that you and others can understand markets well enough to profit on them above the S&P long term. History has consistently proven that is not the case.
And Buffet says investors are better off in low cost index funds. That’s good advice.