Setting target prices is not an exact science, but it always makes sense to ascertain the upside potential when assessing a company’s investment case as well as making a stab at quantifying the downside risk, too. This provides a risk-reward ratio, a valuable tool in any stock selection process.
In many cases, I have side stepped investments simply because the upside potential doesn’t merit an interest at the current price even though the fundamental case for investing is strong. However, I still add the companies to an active watchlist and await a share price pull-back to tip the scales back in my favour. Sometimes the share price never pulls back enough, but that’s life as setting price objectives and entry points is subjective. If enough market participants are willing to pay a higher price then so be it, but you still need to be comfortable with your own entry point.
This subject is highly relevant as the share prices of several constituents of my market beating annual Bargain Shares Portfolios have been closing in on my target prices, so I need to reassess their investment merits to ascertain whether a change in my fair value estimates is in order.