It's a good idea to estimate future price targets on stocks to help you see what the potential for the stock really is. Here's how I do it.
First, take the current P-E and multiply it by the next full year's EPS estimate. This will give you the preliminary target price.
Then average the last four quarters earnings surprises. This will give you the average percentage that the stock beats (or misses) earnings estimates. You can find all this information at Yahoo Finance.
Next, multiply average earnings surprise by next years EPS estimate. Finally add this figure to next years EPS estimate and multiply by the current P-E. This will give you next full year's estimated price target.
(A) CURRENT PRICE (B) CURRENT P-E (C) 2008 EPS ESTIMATE (D) TARGET PRICE (preliminary) (E) AVERAGE SURPRISE (%) (F) 2008 TARGET PRICE (G) 2008 Est. Gain/Loss (%)
Formulas: D= (B x C) F= ((C + (E x C)) x B) G= ((F - A) / A)
Remember, this is only a guideline and anything can happen in the stock market. But I've found that having a target price in mind has given me the confidence to stay aboard a winning stock and not get shaken out during normal corrections.
As legendary stock trader Jesse Livermore put it; "The big money is made by the sittin'and the waitin,'not the thinking." One of the things that great traders like Livermore, O'Neil, Baruch, Darvas, and Loeb have in common is their ability to "let their profits run" by staying with a strong stock for the majority of it's big move.
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