Snipe Your Way to Profits With The Target Price

Investing in stocks is pretty overwhelming, especially for new investors. With so many factors to consider, it's often confusing to understand if there is room for growth in the stock that you are investing in. For example, with the company's financials, industry trends, and market conditions, I wouldn't blame any new investor who would be stressed out before pressing that "Buy" button. But don't fret. There is one helpful tool that any investor can use to help narrow down their choices into companies that have a high return potential. That tool is the "Target Price."

What is the target price?

“Target price” is the price at which an analyst believes where a stock is fairly valued and the price the analysts think the stock will reach within the next few quarters, usually within 12 months. Analysts use various methods to calculate the target price, such as the discounted cash flow model (a valuation method that estimates the value of an investment using its expected future cash flows), the price-to-earnings (P/E) ratio, and the price-to-sales (P/S) ratio. These methods consider the company's financials, industry trends, and market conditions to determine the target price. Since companies are covered by multiple analysts, in most cases, you will find different target prices: High, Low and, and Mean. This allows investors to have a general view of what the analysts see as the lowest expected company’s price in the next 12 months as well as the highest and average when considering all target prices accompanied by analyst recommendations.

How To Use the Target Price?

While analyst recommendation is opinion-based, target price gives investors a quantifiable view of a stock's expected return/price based on the pricing model used. This helps investors evaluate the potential risk/reward profile of the stock. As  “sell” and “buy" recommendations can differ per investor based on an investor's risk tolerance and investment goal, target price may be the essential piece of the puzzle to round out the investors' research with the understanding of the potential upside the stock still has. To get the upside potential, an investor can use the formula:

Upside potential = ((Target Price/Current Stock price)-1)*100

This formula gives an investor an easy way to see if there is still room for the price to grow in the next 12 months. Investors can use this upside potential to shortlist the companies they focus on that can provide a minimum return that matches his/her investment strategy. Because even if the company were a “buy,” if it still does not indicate any upside potential, any investor would have a hard time knowing at first glance if that stock is even worth considering.

Limitations of the Target Price

While the target price provides a good argument for quickly identifying a stock’s potential, investors should still not stop there. It's always best to investigate why analysts suggest a particular valuation, as there will be a justifiable reason behind it, i.e. data in the financials, growth prospects, etc.

So, let’s look at some companies with a significant upside potential (above 30%) in the next 12 months.

Lowe’s Companies Inc. (LOW) 

High Potential Upside: 35.6%

Lowe's Companies, Inc. is a diversified company specializing in home improvement.

In 1921, Lucius Smith Lowe founded the company. The company currently has over 300,000 employees and serves over 19 million customers weekly. This giant has over 1,700 stores in the United States and over 450 stores in Canada.

Numerous products are available from the company for building, maintaining, repairing, remodeling, and decorating. It also offers home improvement products, including gardening and lawn care tools, outdoor living appliances, lumber, and more. In addition, it also offers extended protection plans, repair services, and installation services in various product categories through independent contractors.

Analyst Recommendations and Target Price

Analysts are rating LOW as a “Moderate Buy” based on 12 “Strong Buys,” 1 “Moderate Buy,” 12 “Holds,” and 1 “Sell.” The mean target price is $227.69, and the High Target of $278.00, an upside of 35.6%.

H.B. Fuller Company (FUL)

Upside Potential: 57.27%

 

H.B. Fuller Company is a global formulator, manufacturer, and marketer of adhesives, sealants, and other specialty chemical products. The company includes 3 segments:

• Hygiene / Health and Consumable Adhesive – Provides adhesive products to health and beauty, packaging, and assembly markets.
• Engineering Adhesives and Construction Adhesives – Provides adhesives to transportation, electronics, aerospace, etc.

Analyst Recommendation and Target Price

Analysts are rating FUL as a “Moderate Buy” based on 5 “Strong Buys” and 1 “Strong Sell.” The mean target price is $84.00, and the High Target of $106.00, an upside of 57.27%.

Albemarle Corp (ALB)

Upside Potential: 141.86%

Albemarle Corporation is a manufacturer, developer, and marketer of specialty chemicals across various end markets, including energy storage, petroleum refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals, and crop protection. The company operates through three segments:

• Lithium - develops and manufactures a range of basic lithium compounds, chloride, hydroxide, lithium carbonate, value-added lithium specialties, and reagents, including butyllithium and lithium aluminum hydride. 
• Bromine - includes products used in fire safety solutions and other specialty chemicals applications. Its fire safety technology enables the use of plastics by enhancing the flame-resistant properties of these materials.
• Catalysts - offers three product lines, which include fluidized catalytic cracking catalysts and additives, Clean Fuels Technologies, and performance catalyst solutions.

Recommendation and Target Price

Analysts are rate ALB as a “Moderate Buy” based on 8 “Strong Buys,” 1 “Moderate Buy,” 6 “Holds,” and 2 “Moderate Sell.” The mean target price is $300.69, and the High Target of $498.00, an upside of 141.86%.

Final Thoughts

Looking at target prices recommended by analysts is one of the ways any investor can easily filter out the risk and rewards in any potential investment. Having the ability to easily see if a stock provides an adequate return for your investment is one of the ways any investor can increase the efficiency of his/her investment process. This helps single out companies that can potentially give a minimum return in the next 12 months (i.e. above 30%) and focus on further due diligence on stocks that matter. 

On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.