Stock Question........?

Question

This is coming straight from Jim Cramers book Real Money:

"Now, you dive $27 - last price paid for stock-by $2.18 (companies eps), and you get 12. Thats the magic number you need to know, Maytag trades at 12 times earnings. You are paying 12 times Maytag's previous earnings per share for each share that you buy. That's the real price. The (M)ultiple, 12, times $2.18, the (E)arnings per share, equals the (P)rice per share. We express the price as an equation: M x E = P."

Okay, I understand that but....

"You should always remember this equation as a way to understand how we arrive at prices. We take the earning and we figure out what we are willing to pay for the earnings-the multiple-then we times them and arrive at the price. This formula can also help us figure out future prices. If we know what the earnings estimates are going to be (E) and we can figure out what we might be willing to pay for those earnings (M) we can arrive at a future price or we can figure how much above or below a stock might be from where it might trade in the future.

What are earning estimates listed under? Or where do I find them?

Also where do I find a companies pattern of EPS so I can determine if they will grow.

And If you can, explain how I can get to a future price of a share with that formula.

Thank you!!!

Answer 1

I hate to burst your bubble, but it's been well known for a long time that P/E type of analysis is worthless for predicting future stock prices.

See the book "A Random Walk Down Wall Street" by Malkiel, or any other presentation of stock market statistics.

Answer 2

That's all rubbish. What have historic earnings go to do with future earnings? How many times are brokers estimates wrong? You might just as well read the analysts report and follow the buy,sell or hold.

Answer 3

What Cramer is really saying is the PEG ratio

Go to a stock, say AT&T (T) and then under Key Statistics look at its PEG ratio at Value Measurements

http://finance.yahoo.com/q/ks?s=T

Now, you can also look under Competitors to see how T compares with VZ

http://finance.yahoo.com/q/co?s=T

The PEG ratio basically tells you what you pay for a "$1"

Value Investors like a PEG close to a dollar or under, e.g., Buffet

Growth Investors will take a higher PEG

See for more details:

http://au.searchboth.net/Web/peg+ratio/d...

Answer 4

Read a few more books. No one will have the answer to investing for you. It will be through learning as much as you can & finding what works for you.

Cramer is fun.... but he's not the answer.Consider this book as 5% of what you need to know.

Answer 5

In Yahoo type in the stock symbol and click on Analyst Estimates.