How does equity prices move?
As an equity investor you must understand two very important aspects in equity valuation ie qualitative aspect and quantitative aspect. By quantitative aspect we mean putting numbers like earnings, sales, earnings ratios, PE ratio, growth rate of earnings, sales etc. By qualitative aspect we mean the quality of earnings ie how certain are the earnings and the projected growth in earnings. Whenever the equity prices flare up there can be only two reasons either there will be expansion in earnings or the earnings multiple will expand or both.
Talking of research reports the analyst writing the research report does all the number crunching and opines about the stock prices ie tries to predict the future earnings and the forward PE multiples to project the price target. Sell side research analyst is actually is a man who is hired by the broker to sell you a story about a company and the story revolves about the numbers earnings ( past and present) and the future outlook of earnings.
Multi bagger stocks : Where the story he told was very good and the earnings also proved him right . The earnings show a sustained quality growth along with the expansion in PE multiples. the stock turns out to be a multi bagger. eg Eicher motors , Force motors , Page industries in last few years
Out performer stocks: Where the story told by the analyst was not so good but the earnings show the growth. Then there is no expansion of PE multiples because the market will remain circumspect of these stocks but these stocks can rise very fast. eg commodity stocks like Hindalco, Vedl, Hind zinc etc in 2016.
Under performers: as the name tells when there was a weak story and the numbers are also weak eg. telecommunication stocks like Idea, r comm, bhartiartl in 2016
Then there are Traps: When the rosy story is sold to the audience but the numbers ie the earnings do not support the story. These stocks may outperform for some time but stock prices fall because the rise in price is not accompanied by the rise in earnings. The earnings fail to match the prices.
Hence BEWARE of TRAPS.