12-month price targets have become all too common on Wall Street. Here's why we avoid them at 7investing.com.
March 1, 2020
You’ve asked us some great questions, and here are our answers! We’ve pulled together your most-asked questions into our new “7 Most Common Questions” article series.
One of the most common questions we receive from 7investing subscribers concerns that of a practice that has become all too familiar on Wall Street: Assigning 12-month price targets to stock recommendations.
The short answer: Price targets vary based on the inputs. But we’re holding for the long term.
The longer answer: To be clear, you’ll never see us assign a specific price target to the stocks we recommend each month.
Why not? Because we buy our stocks (and you can see their real-time returns at any time here) with the intention of holding them for the long term — think periods of years, not days, weeks or even months.
That said, we do believe valuation is important — see our investing principle #5 here — but we’ve found all too often the legacy price-target approach Wall Street has popularized becomes an exercise in futility.
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As our CEO Simon Erickson noted in one recent response to a subscriber:
Institutional investing today focuses heavily on valuation. We’ve gotten used to seeing “12 month price targets”, which are the result of financial models built upon valuation multiples or discounted cash flow analyses. I’ve taken several of those institutional financial courses myself…they’re extremely spreadsheet-heavy.
But a key limitation of focusing on valuation is that it heavily depends on the inputs of those models. Small tweaks to the inputs can often produce significant variance in the price targets — especially for innovative, growth companies. Tesla (NASDAQ: TSLA) is a great example. I’ve seen professional, institutional investors issue price targets for Tesla that have ranged anywhere from $10 to $22,000 per share!
So rather than building detailed models, our team focuses more on the bigger picture. We spend a lot of time discussing higher-level market trends that are developing, and then identifying the companies that are in a prime position to benefit from them. We also focus on identifying a few key important metrics that we demand these companies to perform well on.
With that framework in place, we believe our recommendations can continually be evergreen. We’re recommending the innovators with long-term trends as a tailwind, which can be excellent investments even as their stock prices increase. We believe these companies can continue to find ways to unlock value for their shareholders, which often isn’t accounted for in financial models. These are the companies that routinely outperform Wall Street expectations.
For more information on our investing process, you might consider listening to a few of our 7investing Podcast episodes below:
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