Calculating a stock's price target
In the book 'Insider Buy Superstocks', he seems to be calculating price targets like this:
[last quarter EPS] x 4 x PE = price target
Does that look correct?
Is he basing PE off the current stock price?
On page 105, he uses the example of an stock with an EPS of [CO].35 and PE multiple of 20. The price target looks like this:
[CO].35 x 4 quarters = .40 x 20PE = .
Where does the 20PE come from? Shouldn't PE be /.35 = .43.
CVRR's last earnings were .3. It's current price is .25. That would give it a target of 2.3 x 4 x (24.25/2.3) = 9.2 x 10.54 = .97, which is highly unlikely anytime soon.
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The price-earnings ratio is calculated as the market value per share divided by the earnings per share over the past 12 months.
In your example, you state that the company earned [CO].35 over the past quarter. That is insufficient to calculate the price-earnings ratio, and probably why the PE is just given as 20.
So, if you have transcribed the formula correctly, the calculation given the numbers in your example would be:
0.35 * 4 * 20 = .00
As to CVRR, I'm not sure your PE is correct. According to Yahoo, the PE for CVRR is 3.92 at the time of writing, not 10.54. Using the formula above, this would lead to:
2.3 * 4 * 3.92 = .06
That stock has a 52-week high of .98, so .06 is not laughably unrealistic. I'm more than a little dubious of the validity of that formula, however, and urge you not to base your investing decisions on it.
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