Hi Bill,
Here is a recent interesting article on setting price targets:
Investor's Business Daily
Use P-E Expansion To Find A Target Sell Price
Thursday February 26, 10:21 am ET
By Nancy Gondo
biz.yahoo.com
Bargain hunters try to pick up stocks at low prices. As a result, they could miss out on the best growth-stock winners.
Those seeking value often use price-to-earnings ratios, or the current share price divided by forward or trailing 12-month earnings per share, to gauge which stocks fall in their buy range. They avoid stocks with so-called high P-E ratios or those priced above the market.
But many of the best stocks trade at a premium when they break out of bases. You may have to pay more for these stocks, but that's the norm when seeking industry leaders with the best products or services and top-notch growth.
Unlike good bases as seen on a chart, the P-E ratio won't help you time when to buy a stock. It can help you forecast how far a strong stock can rise. This is a secondary sell indicator. So always employ sound sell rules to know exactly when a good stock should be sold.
In general, the P-E of a great stock rises about 130% during the stock's price run. An IBD study found the average P-E ratio of the 95 best small- and mid-cap stocks of 1996-97 grew 123%, from 39 at the pivot point to 87 at their peak.
You can use this as a rough guide to figure out a stock's target price. First, multiply the stock's P-E at its breakout by 2.3. Then multiply the result by the next full year's estimate for earnings per share. There's your target price. If your stock approaches or reaches that level, check its chart for sell signals such as the ones detailed in this column.
You can find the P-E ratio (using the past 12 months' earnings) in IBD's main stock tables on Mondays, Wednesdays and Fridays.
Schnitzer Steel, which topped IBD's list of best stocks last year, had a P-E of 16 when it broke out of an eight-month base the week ended Feb. 28, 2003 (Point 1). At that time, the recycled scrap steel exporter's pivot was 11.43 (adjusted for a 2-for-1 split in August that year).
Using the above formula, multiply 16 by 2.3 and you'd get a P-E peak target of about 37. Multiply that by the next four quarters' profit forecast, or $2.35 at that time, and you get a target stock price of 87.
Midway through its run, you might have gotten worried about the stock's rapid rise. In the week ended Sept. 26, Schnitzer slumped as much as 18% (Point2). But the P-E was just 20, well below the P-E target.
The stock's P-E was 29 when it lost steam in January 2004 and headed into a sharp correction (Point 3). Its P-E grew 81% from the breakout to the peak of 63.79, still about 23 points below the target stock price. Those who bought Schnitzer at the pivot and held it through the peak gained more than 450%.
The market and Schnitzer have slowed down. But if the stock finishes its new base, it may take a crack at reaching its target P-E and price. |
