My book, The Confident Investor, supplies most of the calculations that are used on this site. However, for this site I enhance the calculations a bit that may be confusing to understand if implemented in the book.
The first enhancement is to the Time Weighted Composite Average (TWCA). The calculation is nearly the same as used in the book except for one small addition. I calculate the TWCA as described in the book and then average the TWCA with the average growth from 3-months ago, 6-months ago, and 12-months ago.
To do this I average the closing stock price of 5 days that are 88, 89, 90, 91, and 92 days earlier. As an example, lets say the price 88 days ago was $98, 89 days ago was $99, 90 days ago was $100, 91 days was $101, and 92 days earlier was $102. This would average to $100. If the price today is $110 then the growth was 10% in 90 days.
I do this same logic for 180 days and 360 days. I combine all three average increases into combined average increase. I then average that number with the TWCA that is calculated in the book.
I enhance the TWCA because for the website I want the TWCA to be a bit more responsive to current market conditions. This weights the stock action of the last 12 months much higher than growth 9 years ago. It also puts more weight on the stock price movement than just EBIT or Revenue growth.
In my book, I encourage you to find three different price targets for the stock. I do the same thing for the website but do it in a very automated way. I report 3 different calculations:
- Target stock price (TWCA growth scenario) – Calculates the expected stock price if the company continues to grow at a combined TWCA rate. The assumption is based on current EPS and current P/E. This is exactly as it is described in the book, “The Confident Investor”
- Target stock price (averages with growth) – Calculate the expected stock price if the company grows at an average of combined TWCA and the 5-year analyst’s prediction of growth. This metric also factors in the P/E and the EPS growing at the average combined TWCA growth rate. This calculation is intentionally extreme (either high or low) and is intended to show an absolute best (or worst) case example of what could happen in the long-term if growth is consistent.
- Target stock price (averages with no growth) – This analysis is similar to the one immediately above without the growth.