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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.

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

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  • 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

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