Analyst Predictions and Stock Price

GoogleThis morning Google is up on an analyst updating their target price to $700/share from $600/share. The analyst also highlighted Google’s future business potential.

I have noticed that often times an analyst upgrade or a when a prolific investor starts buying a stock, it becomes a self-fulfilling profecy.

Essentially, the analyst upgrade or the prolific investor can often make the price of the stock hit the target price or rise simply because they say it will. Many investors tend to gravitate towards stocks that other “authorities” have suggested are good ones to buy.

However, if the analyst or prolific investor proves to be wrong over the long term, the stock will sink back to previous valuations, which I have seen happen.

One example of this was with Pier One. I bought in thinking at the time their problems were short term and took advantage of the huge selloff due to what I thought was an over reaction to a couple poor quarters. Apparantly Warren Buffet felt the same way as he also bought in shortly after I did and this shot the price up quite a bit when people found out. However, the problems turned out to be more than Buffet or I thought and the price went back to down and continued further down below what we bought our shares at.

When I’m looking for new investments, I keep a list of all the companies of which I’m a customer. I perform my own analysis and research of a company and if I like what I see and I also see that the company passes by the analysts or other prolific investors, I will consider that as further validation of my research and most likely consider the company for my next purchase.  However, I do not buy into a company just because someone else does or says I should. I have done that before and have been burned.

Two examples are AOL Time Warner and Kmart. I bought those years ago as they were rated buys by popular investment magazines at the time. I thought they would be good ways to diversify my own picks. They both turned out be two of my biggest losers. AOL fell to half of what I paid and Kmart went bankrupt meaning I lost my entire investment. Luckily, both of these were small investments in comparison to my whole portfolio, but the lesson was definately learned. Never blindly trust a stock analyst or prolific investor as they can be wrong.

In the case of Google, as a shareholder I’m glad that analysts are raising the target as it has already caused the price to rise and it probably will continue, but I do think that $700 in the short term is quite rich for the company and I think even at the current price, it may be wise to wait for a pull-back or for the next earnings release before putting more money into it. That is my personal opinion and I could be wrong.

Full Disclosure: I own shares of Google.

** Reposted from Champton.com

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