I know there are a lot of people out there who think the market may
be running out of steam and, naturally, they're wondering if their
stocks are as well.
Of course, there are others who are expecting another push to
the upside, and they are wondering how high they should expect to
see their stocks go.
But regardless of what you think may or may not happen to the
market, everyone would like to have a better understanding of what
their stock's potential price target is. And that's what we're
going to talk about today.
You can do this by using either technicals or fundamentals.
Today, I'm going to focus on the fundamentals.
And we're going to use the P/E ratio to calculate it.
The P/E Ratio Can Tell You A Lot
Many people use P/E ratios to determine a company's perceived
under or overvaluation.
But you can also use the P/E ratio to determine a stock's upside
and downside price targets.
The two most common P/E ratios used are the:
1) P/Es using the Trailing 12 months (or 4 quarters) of
earnings
2) P/Es using the F1 (or Current Fiscal Year) Estimates
You can also use the P/E using 12 Month Forward EPS estimate.
(I’m actually partial to that one over the P/E using F1.)
The calculation for the P/E ratio is simply price divided by
earnings.
For example: if a stock's price is $30 and its earnings are
$1.25, its P/E would be 24.
If that stock's earnings rose to $2.00, the P/E would now be
lower at 15. ($30 price / $2.00 earnings = 15 P/E)
And the most logical conclusion would be to see the stock's
price rise until its most recent multiple (or P/E ratio) of 24 was
hit again.
Why is this so 'logical'? Because if people had just been
willing to pay 24 times earnings, they probably will again if they
believe the company's earnings will continue to improve.
And in an environment where P/Es are increasing, they might be
willing to pay even more.
You'll also find that most of the time a stock's P/E ratio using
EPS actuals is higher than its P/E ratio using its forward
estimates.
That's because of the uncertainty regarding the projected
earnings vs. the certainty of actual earnings.
As the company continues to report (and meet its projections),
the forward P/E ratio typically increases, which means the stock
price increases as the earnings projections are coming to
fruition.
And as more optimism grows over future earnings growth, you may
see the P/E ratio grow even more, getting even higher than its
previous multiple.
Calculating the Price Target
So, the calculation to figure out your stock's price target is
below:
Price x ((current P/E) / (forward P/E)) = future price (or price
target)
In other words: let's say a stock's price was $50 and its
current P/E was 20. Let's also say its forward P/E was 15.
That's: $50 * (20 / 15) = $66.50 price target
Another way of saying this would be: 15 goes into 20, 1.33
times. So $50 times 1.33 equals your price target of $66.50.
Price Target Screen
The screen I'm running today finds stocks with P/Es under their
average P/E over the last 5 years and that also have price targets
of at least 20% or more above their current price.
The Parameters are:
- P/E less than Average P/E over the Last 5 Years
(I want the stock's P/E to be less than the Average P/E over the
Last 5 Years.)
- Price Target greater than or equal to 1.2* the current
price
(Looking for stocks whose price target is at least 20% above their
current price.)
- Zacks Rank less than or equal to 3
(No Sells or Strong Sells allowed.)
Here are 5 stocks that came thru this week's screen:
AHL Aspen Insurance
36.10% upside to $51.16
AIZ Assurant
30.57% upside to $79.37
BRLI Bio-Reference Labs
21.44% upside to $41.74
JACK Jack in the Box
42.82% upside to $62.07
MEOH Methanex
46.21% upside to $100.59
Some great picks, and they are all trading at least 20% below
their projected price targets.
Get the rest of the stocks on this list and start finding stocks
trading below their price targets today. It's easy to do.
Click here to sign up for a free trial to the Research Wizard
today.
Disclosure: Officers, directors and/or employees of Zacks
Investment Research may own or have sold short securities and/or
hold long and/or short positions in options that are mentioned in
this material. An affiliated investment advisory firm may own or
have sold short securities and/or hold long and/or short positions
in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and
strategies are available at:
http://www.zacks.com/performance.
ASPEN INS HLDGS (AHL): Free Stock Analysis Report
ASSURANT INC (AIZ): Free Stock Analysis Report
BIO REFERNC LAB (BRLI): Free Stock Analysis Report
JACK IN THE BOX (JACK): Free Stock Analysis Report
METHANEX CORP (MEOH): Free Stock Analysis Report
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