I don't anchor investment decisions on analyst price targets, especially since most of the time, such targets are usually very short-term in nature. It's rare to come across any price targets that go beyond a year, and most of them are usually for a quarter or two. But for what it's worth, stocks that analysts are bullish on are certainly worth a closer look.
IN PICTURES: 5 Tips To Reading The Balance Sheet
Small Caps Galore
What analysts like or dislike often has nothing to do with valuation, but merely future expectations. In fact, most names are small caps with a business model that promises the prospects of great future growth. That's certainly the case with ArtiCure (Nasdaq:ATRC), a medical device and supplies company. Despite being up nearly 100% in 2010, it's still considered a favorite. Shares trade for $11, valuing the company at $172 million and 11-times book. AtriCure is not showing any profits yet, but analysts still hold onto a $14 price target. (For more, see Become Your Own Stock Analyst.)
Another name liked for its future growth prospects is OraSure Technologies (Nasdaq:OSUR), another medical products company. OraSure makes oral fluid specimen collection devices. Shares trade for $6.38, valuing the company at $295 million. The balance sheet has over $60 million in net cash. Analysts like the company's new product pipeline and feel the company is making progress toward getting FDA approval for its new products. Analyst are targeting an $8 share price at year end, and again this is based merely on projections as the company has no earnings yet to speak of. (For more, see Investing In Medical Equipment Companies.)
Education is the Key
Despite the regulatory uncertainty surrounding online education providers, that's not stopping some analysts from likening Grand Canyon Education (Nasdaq:LOPE), a regional provider of undergraduate and graduate degree programs in business and healthcare. For what's its worth, those two sectors may the best positioned for future job growth. Shares in Grand Canyon trade for $20, valuing the company at just under $1 billion and 20-times earnings. That compares with 11-times earnings for the largest name in the industry, Apollo Group (Nasdaq:APOL), which was one of the worst performers in 2010, falling nearly 35%. Uncle Sam is a big source of revenue for these companies and is currently investigating how it can subsidize education. Such uncertainty has made many investors question the business model of for-profit education stocks.
The Bottom Line
Analysts are trained to forecast future prices typically based on growth projections in net income. Those profits need to ultimately find their way into the cash flow statement and create free cash flow. Also, keep in mind that after two great years of returns, most upside potential may not provide a sufficient margin of safety. (For more, see Do-It-Yourself Analyst Predictions.)
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