Say you’re an investor. You’re trying to figure out whether to buy or sell a certain stock. One data point that can help is the stock’s target price, a number that is predicted by a stock analyst based on a few factors.
“This is where I think the stock is going to be, say by the end of the quarter, based on everything I know now, everything I see ahead,” explained Karen Petrou, managing partner at Federal Financial Analytics.
If an analyst thinks a stock will hit $100, but right now it’s sitting at $50, that might be a cue to buy.
Analysts predict how high or low a stock is going to go by doing some old-fashioned number crunching. They start with the basics, like poring over a company’s financial statements, and “what kind of cash flows the company is generating, what kind of business strategy it has, if the market share is stable, if it’s growing,” said Saule Omarova, a professor at Cornell Law School.
Analysts also consider the health of the industry and macroeconomic factors, like interest rates. And then they have conversations with investors.
But there’s not an exact formula, said Jeff Mills, investment strategist at PNC. “Not every analyst is going to come to the same conclusion about a particular stock and that’s why some people buy shares and some people sell shares of the same security,” he said.
But Mills says price targets can move markets, especially if they come from an analyst with a good track record.
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