Step 3: Target Prices

It's more work, but the target price method gives you the best insight into a stock's valuation. The strategy involves forecasting EPS for the target year by estimating sales and the profit margin, which gives you net income, and then dividing by the expected number of shares outstanding to get estimated earnings per share. Once you know the EPS, you can establish target prices by estimating the likely P/E range for the stock after its target year earnings have been announced. Here's how I would have done it for Impath in June 2000.

I'd typically held growth stocks for 12 to 18 months, so I would have calculated Impath's target prices for early 2002, after its 2001 fiscal year results had been reported. The numbers used ...

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