6. Analysis Tool #3: Establish Target Prices

Before they buy a stock, many professional money managers compute a target price—the price they expect to sell it at if all goes well. The target price defines the potential profit on the investment, and if it isn’t high enough to justify the risk, they don’t buy the stock.

Computing target prices is not the same as determining the growth expectations implied by a stock’s current trading price (as described in Chapter 5). Instead, the target price calculation forecasts a stock’s trading range at some future time. How far depends on your goals and investing style. Value investors usually analyze distressed companies. Since they don’t know when they will recover, they often look two to five years ahead. ...

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