Investors sometimes ask us why we don’t publish price targets on the stocks we recommend in our newsletters and investment services.
Focusing on stock-price targets puts too much emphasis on predictions
We don’t publish stock-price targets for several reasons. The main one is that they may lead investors to rely too heavily on predictions, which are the least reliable part of the investment decision-making process.
Big bets on predictions or opinions will always produce inconsistent results. That’s why successful investors recognize that predictions are of limited use in investing profitably.
Instead, we continue to recommend that you focus on investment quality and diversify by following our three-pronged investing philosophy. (See below for more on how this strategy can help you improve your stock market profits and lower your risk.)
Using stock-price targets to sell can make you miss out on some big gains
Another drawback of stock-price targets is that they can spur investors to quit buying or even sell their best picks way too early. By definition, after all, your best picks are those that do way better than you ever expected.
To make serious profits in stock investing, you need to hang on to your best performers for years. That’s because even good stocks sometimes go sideways for decades, while others turn out to be “ten-baggers,” with gains of 1,000% or more. If you are too quick to sell stocks that have gone up, you may avoid some 20% setbacks. But you’ll also miss out on some 200% gains.
Targets do tend to push up your stock market trading activity and commission expense, because they give you a rationale for selling whenever a stock you own hits its target. This helps explain the popularity of targets in brokerage research.
Instead of relying on stock-price targets, we recommend that you follow our three-pronged investment philosophy. That is, invest mainly in well-established companies; spread your money out across most, if not all, of the five main economic sectors (Manufacturing, Resources, Consumer, Finance, Utilities); and downplay stocks that are in the broker/public relations limelight.
That way, you protect yourself from an unforeseeable industry downturn. You also increase your chances of stumbling upon a market superstar--a stock that does much, much better than average.
After all, if it was so easy to predict share-price movements ahead of time, investing would be incredibly profitable and nobody would have to work. Of course, the universe isn’t built that way.
Instead of looking to stock-price targets for buy/sell signals, we usually start by looking at these ratios:
- Low price-to-earnings and price-to-sales ratios—signs of a cheap or undervalued investment.
- Low price-to-book-value ratio—another sign that the stock is cheap in relation to other stocks on the market.
- High dividend yield—the stock’s annual dividend divided by the share price. A high dividend yield could indicate a cheap stock that is set to rise.
Look to minimize risk with a sound and balanced value stock investing strategy
Instead of moving between extremes of risk, we continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries. That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established, safety-conscious stocks have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions.
Overall, lower-risk investments equate to safer investments. For conservative investing, focus on investing in high-quality stocks that offer hidden value.
These assets include long-time real estate holdings that are worth much more than their balance-sheet value (usually original cost minus depreciation). Under-used brand names are another good example. When they are developed in-house, they won’t show any balance-sheet value. Another key hidden asset—one of our favourites—is research spending. Companies write off their research outlays in the year in which they spend the money, but benefits such as new or better products may only materialize years in the future.
Use these tools and measures from four key areas to pick stocks to go in your portfolio
- The investment-quality markers we use to award our TSINetwork investment-quality ratings;
- Valuation factors, including the P/E and other financial ratios;
- Extra value factors—hidden value and other hidden or overlooked pluses—that help create outsized returns;
- Reasons for wariness. These are potential trouble spots that could hinder long-term performance or lead to significant long-term risk. We take these factors into account, but we sometimes accept one or more of them in a stock that has hidden value or other merits to offset the negatives.
