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Read thoughts from Ralph Seger about this topic.
More from Ralph Seger.

Evaluating Potential Future High and Low Prices

Our goal in sections 4 is to look at the risk component of Risk and Reward.  Click here for an SSG "Value" calculator where you can experiment with the numbers.

Section 4 will continue this process that was begun in section 1 with our five years EPS forecast, and continued in section 3 with our look at historical values and selection of average high and low P/E's.

Estimating a Potential Future High Price

Estimating a five year future potential high price is relatively straight foreward from a mathmatical stand point.

From section one, we take the estimated five year EPS value and multiply it by the highest P/E that we are likely to see in the next five years.

Five Year EPS forecast X Forecast High P/E = Anticipated five year high price

The forecast five year high P/E is selected by using your judgment after examining the historical 5 or 10 year high P/E trend in section 3, removing any anomalies we call outliers, and adjusting for any anticipated slowing rates of growth for sales and EPS.

Estimating a Potential Future Low Price

Section 4 contains 4 possibilities for calculation a selected low price.

The question here is how low of a price might I reasonably see in five years.

If we are using the SSG to analyze a growth stock, (as it was originally intended) then it makes sense to believe the EPS for the next five years will be no lower than it is from the company's latest quarter. If earnings go way down, I'd suggest you have encountered the "one in five" and consider you've made a mistake, sell, and move on.

The formula for the low price via this method is:

Latest four quarters EPS X Forecast 5 year low P/E = Future Low Price

Click here for a discussion of the other choices for Low Price.

Estimating Risk - Upside/Downside Ratio

The Upside/Downside (US/DS) ratio is a measure of the possible gain in price to the possible loss in price for the next five years based upon our forecast high and low price from the current price.

It is calculated by: ( High Price - Current Price ) / ( Current Price - Low Price )

We are looking for a ratio of 3:1 or greater which means, based upon our forecasts, the potential price gain is at least 3 times greater than the potential price loss.

Selecting a low price is the most sensitive decision in this calculation and affects the ratio the most.

As a general rule of thumb US/DS values over 10 should be viewed with suspicion and the low price should be re-evaluated.

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