Kevin Matras shows how to create your own price targets and how to estimate your stocks’ future earnings multiples. Stocks in this week’s article are Abaxis, Inc. (NASDAQ: ABAX), AES Corporation (NYSE: AES) and Petrohawk Energy Corporation (NASDAQ: HAWK). Click here for the full story exclusively on Zacks.com: http://at.zacks.com/?id=109
Screen of the Week written by Kevin Matras of Zacks Investment Research:
Have you ever looked at an analyst’s price target and wondered where they came up with that number? I’ve looked at enough price targets to conclude that I shouldn’t be looking at price targets. Some are so far out there that I couldn’t imagine how a company could even get near it. And others are so low (and seemingly unattended) that you’re already well above it, meaning you would have gotten out just as the biggest part of the stock’s move was heating up.
It’s true that price targets aren’t meant to be set-in-stone promises, and they shouldn’t be used in a vacuum either. But it’d be great if they could make a bit more sense and be a little more realistic.
So here’s a way to create your own price targets.
Let’s say stock ABZ’s current price is $31.25 with $1.25 in earnings, for a P/E of 25. And let’s say its five-year average P/E is 30. Moreover, let’s also say the stock’s industry has started to move and is creating lots of interest. You could begin your evaluation by going back and seeing under what conditions stock ABZ scored its highest multiple (P/E) and see how the industry’s multiple had behaved as well. (You might even want to see how the market’s average P/E has changed too.)
Once you’ve determined that multiples are expanding for instance -– and based on past multiples, you’ve decided that another 5 points for your industry is reasonable -- you might conclude that another 5 points should be added to the future multiple of your stock too.
To come up with a price target, I’d take ABZ’s earnings ($1.25) and multiply it by the new multiple of 30 (25 + 5 = 30) to get my price target of $37.50.
And as earnings estimates climb, I’d continue to reevaluate my target price by reevaluating its multiple and etc. And assuming everything was the same, if earnings were now estimated at $1.50, I’d multiply $1.50 x my multiple of 30 for a new target of $45.
Of course, when predicting multiple expansions (or contractions), you should continue to pay attention to the market, the industry, its peers and of course the stock itself to avoid having your targets get stale.
Besides determining price targets, you can also use these ideas to find stocks on the move with potential multiple expansions.
The screen I’m running today finds stocks with P/E’s under the average for their Industry and are under their average P/E over the last five years. But it must also have shown an increase in its P/E over the last quarter to demonstrate its responsiveness to higher earnings, which is also a part of the screen.
The Parameters are: -- P/E less than Industry's Average P/E (Stocks with P/E's that are less than the average P/E for their Industry, implying it should have room for P/E growth.) -- P/E less than Average P/E over the Last 5 Years (I want the stock's P/E to be less that the Average P/E over the Last 5 Years.) -- Current P/E greater than P/E from 12 Weeks ago (I want to see that the P/E has begun to move.) -- % Change in Actual EPS Growth Q(0)/Q(-1) greater than or equal to 0 and -- % Change in Estimated EPS Growth Q(1)/Q(0) greater than or equal to 0 (I included both the actual Quarterly EPS Growth and the projected Quarterly EPS Growth to make sure the stock's earnings were moving up.) And for good measure: -- % Change in Actual EPS Growth F(0)/F(-1) greater than or equal to 0 and -- Change in Estimated EPS Growth F(1)/F(0) greater than or equal to 0 and And lastly: -- Price greater than or equal to $5 and -- Volume (20 day average) greater than or equal to 50,000
This screen produces plenty of great stocks to consider with the potential for continued multiple expansion. Here are a few of them:
ABAX Abaxis, Inc. AES AES Corp. HAWK Petrohawk Energy Corp.
This type of screening requires access to historical P/E ratios and forward P/E ratios. Most screeners don’t have this. But the Research Wizard does!
Get the rest of the stocks on this list and start looking for new stocks on the move. And then start creating your own price targets. Sign up now for your free trial to the Research Wizard and start finding better stocks today. http://at.zacks.com/?id=111
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.
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