It’s something a lot of people ask. And buying stock without a sell target is dangerous. So this blog post will explain how you can pick a sell target using both fundamental and technical analysis.
You can also watch the video FLEX analysis below to see the principals in this blog applied.
When I talk about picking a sell target, I am referring to an intermediate to long term price target. I believe the stock will hit this price at some point in the future, based on fair value and historical price. Specifically…
Picking A Sell Target – Technical Analysis:
When you determine a sell target for your stock, you should be sure to look at the prior prices. Pull up a chart of your stock idea. Then zoom out to get a ten year view (at least). Over this time period, most stocks trade in a channel. Here’s what you do:
Look at the highs and look at the lows. Ask yourself…
“Where’s the low end of the high range?” It will probably be about 20-30% off the highs. And if you’re willing to hold your stock long enough… (and the company doesn’t implode)… you can reasonably wager your stock will “eventually” get back to this price.
This is basic technical analysis, sure. But price has memory. And when the fundamental case supports your technical hypothesis, you can make cake. But there’s another ingredient…
Picking A Sell Target – Fundamental Analysis:
Fundamental analysis is another factor in calculating your sell target. It’s irresponsible to choose a sell target based only on technicals. You can greatly increase your odds of success by looking at the financial statements.
The Graham Number is quick test you can use to see if the fundamental analysis supports the technical analysis. If the numbers align, the decks could be stacked in your favor. Here’s how it works…
The Graham Number gives you a sell target based on the fair value of the company. The number is calculated using earnings per share and book value per share. The output of the equation derived by Benjamin Graham so many years ago gives you a price that is the most a defensive investor would pay for the stock.
Does that make sense? Hopefully your Graham Number, which is based on the business fundamentals, gives a similar (or higher) price. Got it?
In action, here’s what it looks like…
When I pick a sell target I typically look for the lower of the technical and Graham numbers, plus or minus 5%. I also usually scale in and out of my positions. So I might sell 1/5-2/3 or my position and let the rest ride towards the other price target (with a stop order at the first sell). Cool?
Picking A Sell Target – Due Diligence And Further Research:
You need to do your own due diligence when you pick a sell target. Before ever making financial decisions you should do your own research and contact your financial professional. In terms of other metrics…
I like to look at current ratio and operating cash flow to understand that the business is short to intermediate term viable. I try to avoid big debt burdens.
And you should also read conference call transcripts, at least the couple quarters prior. You need to get a handle on management and the company’s position in the industry if you want an accurate sell target.
At least, that’s my opinion.