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 $11 stock with an EPS of $0.35 and PE multiple of 20. The price target looks like this:

$0.35 x 4 quarters = $1.40 x 20PE = $28.

Where does the 20PE come from? Shouldn't PE be $11/.35 = $31.43.

CVRR's last earnings were $2.3. It's current price is $24.25. That would give it a target of 2.3 x 4 x (24.25/2.3) = 9.2 x 10.54 = $96.97, which is highly unlikely anytime soon.

  • 1
    Maybe the writer has decided that the target of all stocks is a PE of 20. – mhoran_psprep Sep 23 '13 at 17:21

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 $0.35 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 = $28.00

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 = $36.06

That stock has a 52-week high of $35.98, so $36.06 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.

  • Thanks Chris. My EPS is $2.3 and the one from NASDAQ is also $2.3. Why do you say it might be incorrect? – 4thSpace Sep 23 '13 at 16:57
  • Ah, thanks. Yes, I meant your PE. You show a PE of 10.54, but Yahoo lists 3.92. I'll edit my answer. – ChrisInEdmonton Sep 23 '13 at 16:59
  • How do you calculate earnings per share over twelve months? Take the last 4 quarters and average? If you don't like the above formula for calculating a target price, what are you using? – 4thSpace Sep 23 '13 at 19:35
  • To calculate the EPS over twelve months, sum up the earnings over the last twelve months and divide by the total shares. – ChrisInEdmonton Sep 23 '13 at 21:34
  • The question is where did the 20 come from? You havent answered that. – geodex Sep 13 '16 at 22:27

protected by Chris W. Rea Oct 22 '17 at 3:01

Thank you for your interest in this question. Because it has attracted low-quality or spam answers that had to be removed, posting an answer now requires 10 reputation on this site (the association bonus does not count).

Would you like to answer one of these unanswered questions instead?

Not the answer you're looking for? Browse other questions tagged or ask your own question.