A reader asked me what was my target price for a particular stock in another of my blogs. I had been stumped for some time and realized that I really do not have a focus on price for my stocks really! I do have valuation limits on what price I could buy or sell a stock, but they won’t be the same as target prices.
Let me elaborate further on the buy side and sell side separately. Creating a target buy price suggests that there is a particular stock that you want to buy but is waiting for the price to fall to the right level. To avoid myself from overpaying for stocks, the maximum price I’d purchase a stock is 1.8 to 2.0 times the written reserve value of the stock. It appears like a target price, but it is actually a stock-selection criterion.
- Value the cash flow to equity, and
- Profitability Index
- 6% – 7%
- Net Debt to Investments
All stocks that fail the criterion wouldn’t normally be considered for sale. The Price/Book (P/B) criterion works the same way as the Debt/Equity criterion. The stocks and shares either pass or fail the criteria; it isn’t quite the same as waiting for the purchase price to fall to the right level. The litmus test of if the P/B threshold is a target price is to consider what happens when the price falls to that level. Nothing happens, until the next review.
If, within the next review, the stock is below the P/B threshold still, it might be considered for purchase, assuming it goes by all other requirements. There are shares which I wait on the sidelines before buying also. However, I am not waiting for the right price, however the right moment.
Take for example, Keppel Corp, which I am interested to average down. Predicated on my assessment, Keppel Corp has not seen the worst of the Oil & Gas winter yet. 4.this season 64 reached earlier, I would not be keen to buy the stock. 6, I’d be interested to buy at the bigger price. The primary reason is to wait for the purchase price to reflect completely the business conditions as well as evaluate whether the company is able to recover fully.
All these devote some time. I view Keppel Corp as a long-term investment, thus it is a lot more important to understand the business enterprise conditions completely than to buy at a low price. Creating a target sell price means that you are waiting for the price of a stock to go up to a specific level before selling.
It does mean that if the price will not reach the prospective level, the stock would not be sold. Like the buy side, I have valuation limits on when I have to sell a stock, no matter how much I like it. The P/B percentage for selling is 3.5 to 4.0 times.