Here’s our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. This week’s question: I’m learning so much from the Club about when to buy and sell. One piece of the puzzle that still confuses me is the price target. Using Eli Lilly as an example: Jim posted a new 12-month price target of $600 and the stock is around $528. A purchase now would result in a 14% increase. Of course, getting shares at a lower cost would be more profitable, but I would also not want to give up a 14% potential gain. How does an investor take the price target into consideration? — Thank you, Kathy Questions about price targets come up often and are always worth reviewing. The first thing to address: What exactly is a price target anyway? It is our best estimate of a company’s “fair” or “intrinsic” value. There are several ways to determine fair value, the two most popular methodologies are the multiples-based approach and the discounted cash flow approach. As active investors, our tendency, which is in line with most on Wall Street, is to focus on the multiples-based approach when developing our price targets. A multiples-based approach places heavy importance on performance over the next 12 to 18 months, whereas the discounted cash flow approach is heavily weighted (as much as 70% or more) toward the “terminal value” that looks five or more years into the future. For more, here is a quick primer on price targets and how to use them. So how should you think about the price target after a stock has had a major move? Eli Lilly (LLY) jumped over 18% over the past two weeks but is still far from its price target. Why not buy right here? LLY 1M mountain Eli Lilly 1-month performance Let’s start with our revised price target for Eli Lilly, which came from the strength we saw in the most recent earnings report and the belief that this is the best growth story in large-cap pharma. That’s largely due to the potential of diabetes treatment Mounjaro and donanemab, an Alzheimer’s drug. At $600, we have calculated the fair value for the stock of LLY at just under 48 times 2024 earnings estimates of $12.53 per share. That’s a high multiple for any stock, but it’s actually down significantly from where shares are trading at right now on 2023 numbers ($535 on 2023 estimates of $9.58 put us at just under 56 times earnings). That means shares can appreciate to our $600 target while becoming cheaper over time thanks to earnings growth. The current long-term growth expectation is for about 24% annually on average over the next five years (to $27.78 in fiscal year 2028). If we take our 48 times target multiple and divide by the 24% growth rate we get a “PEG” ratio (or growth adjusted earnings multiple) about 2 times, which is only slightly higher than the 1.8 times average we’ve seen over the past five years. That slight premium is more than warranted given our views on the sales potential of Mounjaro and donanemab. On Mounjaro in particular, the addressable market may be even larger than initially thought as Eli Lilly is looking into its potential to treat other medical conditions beyond diabetes and obesity. That all sounds great, right? Why not jump in and buy here? We currently have a 2 rating on LLY shares, meaning we would prefer to see a pullback first. As much as we like the long-term story, we just aren’t comfortable recommending a stock that has had the quick move that Eli Lilly has in recent weeks. We tend to view parabolic moves as an opportunity to book profits — not a chance to chase a move up. If you’re still interested in starting a position at current levels, consider making a small purchase. Our discipline and investing strategy is unwavering: You never buy a full position in one swoop . Get some exposure, but keep cash available for future buys should the share price come back down. We will continue to monitor LLY for any opportunity to upgrade the name to a 1 rating. That would likely require shares to come down or at least consolidate into a narrow trading range, which would provide time for that earnings growth to happen. We would also like to see a positive catalyst on the near-term horizon. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Here’s our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries.
This week’s question: I’m learning so much from the Club about when to buy and sell. One piece of the puzzle that still confuses me is the price target. Using Eli Lilly as an example: Jim posted a new 12-month price target of $600 and the stock is around $528. A purchase now would result in a 14% increase. Of course, getting shares at a lower cost would be more profitable, but I would also not want to give up a 14% potential gain. How does an investor take the price target into consideration? — Thank you, Kathy
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