Site Content

There are usually four keys to determining the legitimacy of a target price:

• Earnings per share (EPS) forecast model, including a full income statement with a discussion of operating cash flows for the time frame covered by the target price.
• EPS forecast assumptions that are reasonable and justifiable.
• Valuation multiples (P/E, P/B, P/S) that are appropriately applied to the stock in question and rely on a host of different variables.
• Assumptions used to justify the valuation multiples used should be compared to historical trends, relevant peer groups and current economic expectations, and be reasonable.

You can do all this work yourself and come up with your own price target, but I prefer to use analyst price targets that are already readily available. We're seeking a more general target price to use as a guide, and prefer using the average consensus target price from multiple analysts. The goal is to avoid pump and dump marketing schemes and analyst bias. Seeking a consensus from multiple analysts with high and low projections is ideal. Several sites, such as Seeking Alpha, provide this type of information. To get a decent estimate, it's best to have as much analyst coverage as possible and retrieve the average estimate. This approach provides a clear and concise method for obtaining a target price for a stock.