There is no proven relationship between historical and future corporate share prices. The past will not predict the future.
Does that mean you ignore historical data? No, you simply need to put the data in proper perspective. It is possible to ascertain, with a degree of assuredness, certain price pattern characteristics from which you can deduce with a degree of confidence the likelihood of a price movement in a specific direction.
What you are doing is analyzing the one thing that investment prices have in common -- that they are a reflection of the hopes, fears, optimism and greed of the market's participants.
The sum total of those emotions is what directs a stock's share price. In other words, what you are seeing is supply and demand reaching continually changing states of equilibrium. It is as simple as that, and it happens thousands of times each day.
As Garfield Drew noted in his book "New Methods for Profit in the Stock Market," the quoted price of a stock is never what the stock is worth but rather what people think it is worth.
Martin Pring wrote in his book "Technical Analysis Explained" the price of a share of stock is a reflection of the changes in investor attitude, while time measures recurrence of those changes and volume is essentially a measure of the intensity of those changes. I would not argue with that.
Because the price patterns of stock prices have been repeatedly analyzed and catalogued, technical analysis distills down to a degree of self-fulfilling prophecy. If everyone believes a pattern means an investment vehicle's price will rise, the upshot is an upward price move.
Therefore, your objective, via technical analysis, is to analyze the mood of the crowd and then take either a similar or a contrarian position. Unfortunately, whenever the price of a security draws an inordinate amount of attention, there is also a tendency to lean on boisterous prognosticators for advice.
That is a mistake. Never take the opinions you hear or read to be the gospel.
A person selling an investment is unequivocally biased. It does not matter how many letters they have after their name, how sincere they appear, or how long you have known them; they sell for a living. Always obtain an independent second opinion, preferably from your own research.
Yes, virtually everyone can learn to undertake at least a minimal amount of investment research. A good place to start might be MWI Veterinary Supply (MWIV). It is one of the companies I mentioned in my list last week. The company is a leading distributor of animal health products.
When I wrote about MWI a year ago, my earnings estimate for fiscal year ended Sept. 30, was $4.75 per share with a 12-month price target of $128. So how did the company do? Earnings for the year came in at $4.95 per share, and the shares recently closed at $175.33.
MWI's guidance is for fiscal year 2015 revenues of $2.89 billion to $2.94 billion, representing a growth rate of 23 to 25 percent, while earnings are projected at $5.47 to $5.67 per share, an increase of 10.5 to 14.5 percent year-over-year.
The intrinsic value using the discounted earnings model with an earnings growth rate of 16 percent and a discount rate of 12 percent is $183 per share, while the more conservative free cash flow to the firm model with a revenue growth rate of 19 percent yields an intrinsic value of $199 per share. My earnings estimate for this year is $5.74 per share, with a 12-month price target of $196 for a 12 percent capital gain.
Lauren Rudd is a financial writer and columnist; write to him at LVERudd@aol.com