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How To Invest

How to Set Price Targets on Your Stocks

March 22, 2021 | by Nancy Zambell

a d k v s

Thinking of Buying a Stock? You’d Better Put a Price Target on It First. Here’s How to Do It.
It’s important to set price targets on all your stocks the day you purchase them.

Your target should be based on the P/E of your stock, multiplied out by expected future earnings. I recommend that
you at least think about what price your stock can achieve within 18-24 months. And that should at least be a
30%-50% gain. If it doesn’t have that potential, keep looking.
Going forward, when the stock hits your target, reevaluate it and determine if it has the ability to continue double-digit
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price gains or if you would gain more by cashing in now and using those5funds
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more potential. Many of the contributors to my Wall Street’s Bestcharacteristics
newsletters maketothis decision
drive themeasy for you, by
5 Best Stocks to Buy in April
providing targets for their recommendations, and often cash in just a portion of the holding to take some pro ts and
let the remaining half ride toward a new target.

You know you can do it. But how?

The current stock market is creating huge opportunities to invest - even during a pandemic. And unless you
majored in nance or are a stock broker yourself, you may not feel con dent enough to start investing on your
own.

This free report aims to give you the con dence - and the right know-how - to dive right into the stock market.
We'll show you how.

Download it today, FREE when you sign up for our complimentary Cabot Wealth Daily advisory!

Don't be left out!

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When I speak at Money Shows across the country (pre-Covid at least), I am frequently asked about how I set my price
targets. If it’s not the most common question I get, it’s certainly up there in the top ve.

First of all, I can’t emphasize too strongly that it is essential to set a target at the time you buy a stock. If you don’t,
then how the heck do you know when your stock has appreciated enough to sell it?

I always ask my workshop attendees how many set price targets on their stocks, and I never see more than two or
three hands go up. That’s a shame, but I think it’s because folks just don’t know how to set targets, rather than them
not wanting to. So, let me tell you how I do it, but keep in mind that, like all investing, it is not black and white. It’s a
combination of science, art and experience. But most of all, it’s easy! No complicated math here—just a few
assumptions.
Let’s walk through an example step-by-step. For this example’s sake, we’ll set your holding period at three years, max.
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Price Targets G
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You’ve done5your
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research and to
haveBuy in April
selected the stock you want to buy—the (theoretical) Widget Co. The price of the
stock is $10 per share, the company made $2 per share in the last four quarters, so its price-earnings ratio (P/E) is 10
divided by 2, or 5.

The company’s earnings have been increasing at a 20% annual growth rate for the past ve years. With a little
calculation, you can project out over the next three years, and if that same growth rate continues, the company’s
earnings will look like this:

Year 1: 2.00 x a 20% increase = $2.40 per share

Year 2: 2.40 x a 20% increase = $2.88 per share

Year 3: 2.88 x a 20% increase = $3.46 per share

So, at year 3, your company is earning $3.46 per share. Now, if its P/E ratio remains the same (5), the projected price
of the shares can be found by mere substitution into the P/E equation, and solving for P:

P divided by E (3.46) = 5. So, a little algebra later, P = $17.30. Wow—that’s a 73% gain! Most investors would be
tickled pink by that.

However, should you believe that the company’s earnings may grow even faster than 20% annually, due to some event
such as a tremendous new product, gains in market share, new markets, etc., or that one of those occurrences might
drive the company’s price greater than $17.30 (even without the requisite earnings growth), you would be even
happier.

To be on the safe side, it’s also smart to calculate what would happen should the Widget Co. not grow as quickly over
the next three years as it had for the past three.

Easy as 1-2-3, right? OK, it’s time to practice this exercise. I’ve shown you each step of the process in the following
worksheet, so you can see exactly how I’ve come up with these projections.

Doing the Math on Price Targets

COMPANY NAME; SHARE PRICE: Widget Co.; $10.00 

P/E:  5

http:// nance.yahoo.com

EPS (last 4 quarters):                                                                             $2.00

http://reuters.com; estimates

5-year annual earnings growth rate:                                         20.0%

http://reuters.com; ratio comparison page; growth rates

Scenario 1 – Projecting future earnings growth at same rate as current
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Year 1 earnings Report:
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EPS x annual EPS growth rate projection (20%) = Year 1 EPS     $2.40

Year 2 earnings projection:

Year 1EPS x annual EPS growth rate projection = Year 2 EPS      $2.88

Year 3 earnings projection:

Year 2 EPS x annual EPS growth rate projection = Year 3 EPS     $3.46

Scenario 2 –Earnings growth rate different than current rate

Year 1 earnings projection:

EPS x annual EPS growth rate projection (25%) = Year 1 EPS      $2.50

Year 2 earnings projection:

Year 1EPS x annual EPS growth rate projection = Year 2 EPS      $3.13

Year 3 earnings projection:

Year 2 EPS x annual EPS growth rate projection = Year 3 EPS     $3.91

Scenario 3 –Earnings growth rate different than current rate

Year 1 earnings projection:

EPS x annual EPS growth rate projection (16%) = Year 1 EPS      $2.32

Year 2 earnings projection:

Year 1EPS x annual EPS growth rate projection = Year 2 EPS      $2.69

Year 3 earnings projection:

Year 2 EPS x annual EPS growth rate projection = Year 3 EPS     $3.12

Now, you can substitute those results into the following equations to obtain the projected price of the company’s
stock in three years:

Scenario 1

Expected Price = Current P/E x Year 3 EPS projection                   $17.30

Scenario 2

Expected Price = Current P/E x Year 3 EPS projection                   $19.55

Scenario 3
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Expected Price Report:
= Current P/E x Year 3 EPS projection                   $15.60 G
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5 Best Stocks to Buy in April
And there you have it! So, now you can use a similar methodology on all of your stocks. But remember, the targets are
a result of the projections you estimate, and if you alter those estimates—even a little—you will change your results.
After all, I did say investing was also an art!

I hope you’ll have some fun with this and also share it with your fellow investors. I think setting a target is one of the
most important ingredients for success as an investor. The process will make you very familiar with your holdings,
teach you to be disciplined, and help you determine when to sell your stocks.

Secure Your Financial Freedom

Nancy Zambell, Chief Analyst of the Financial Freedom Federation, has spent more than 30 years helping investors
navigate the mine elds of the nancial industry. Nancy's book, Make Money Buying & Selling Stocks is an
introduction for new investors and a reminder for experienced investors on how to pro t in the stock market.
LEARN MORE

*This post has been updated from an original version, published in 2019.
 Enter you
These 5 stocks have the top ×
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characteristics to drive them
5 Best Stocks to Buy in April

You know you can do it. But how?

The current stock market is creating huge opportunities to invest - even during a pandemic. And unless you
majored in nance or are a stock broker yourself, you may not feel con dent enough to start investing on your
own.

This free report aims to give you the con dence - and the right know-how - to dive right into the stock market.
We'll show you how.

Download it today, FREE when you sign up for our complimentary Cabot Wealth Daily advisory!

Don't be left out!

Email Address GET MY REPORT

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