Messages: What Members Are Asking On-Line

Webcasts on Yahoo!

CI Editor Responds: We always appreciate it when our readers suggest new Web sites or programs. If you know of a Web site or software package that you feel is worth mentioning in Computerized Investing, please let us know via E-mail at ci@aaii.com.

Screening for Chart Patterns

CI Editor Responds: The comparison article that begins on page 9 in this issue covers on-line technical analysis and charting services. Some of these services provide “canned” screens on various technical variables, or allow you to set up your own technical screens. A select few take this one step further and identify popular chart patterns, such as double bottoms or tops. Two of my favorites are StockCharts.com and MarketScreen.com. StockCharts.com offers free access to over 30 predefined screens looking for candlestick and point & figure chart patterns for stocks traded on the NASDAQ, New York Stock Exchange, and American Stock Exchange, as well as the Toronto Stock Exchange (TSE) and Canadian Venture Exchange (CDNX). You can also search for mutual funds exhibiting various point & figure patterns. Subscribers can create their own screens and can integrate over 40 different chart patterns into their custom scans. MarketScreen.com, which is exclusively a fee-based service costing $59.95 per month, screens on 50 different chart patterns, including cup-with-handle and head-and-shoulder patterns.

Comparing ETFs’ Price-Earnings Ratios

CI Editor Responds: The price-earnings ratio (current price divided by earnings per share for the trailing 12 months) is a popular measure of valuing stocks, and there is very little wiggle room when it comes to arriving at the denominator (earnings). While you can use different measures of earnings—earnings from continuing operations or even estimated earnings—the conventions used to arrive at these figures are, for the most part, widely accepted and followed.

When calculating the earnings of a basket of stocks such as an exchange-traded fund, a straightforward approach would be to calculate a weighted sum of the market value of all the stocks in the index and divide that figure by the companies’ total earnings. However, it appears that the companies selling ETFs use a variety of techniques, some of which do not present a true picture of total company earnings. According to a March 13, 2006, Wall Street Journal Online article [“The Inexact Business of Valuing ETFs”], Barclays Global Investors’ iShares exclude all loss-making companies when calculating total earnings for the companies in an index. Surprisingly, the article points out that Barclays is not alone in this practice, as numerous data providers follow the same methodology. Barclays defends its methodology by claiming that since investors typically ignore negative price-earnings ratios for individual companies, they do not include them in their calculations.

However, this presents a problem for investors trying to compare ETFs on the basis of price-earnings ratios. All else being equal, excluding negative earnings will boost the overall earnings of the basket of stocks in the ETF. As the denominator, in this case the “earnings” of the companies in the fund’s portfolio, increases while holding the market value or price of the portfolio constant, the price-earnings ratio of the fund will fall.

The WSJ.com article also points out that, even if unprofitable companies are included in the calculation, there is no guarantee that ETFs offered by different companies on the same underlying index will have the same price-earnings ratio. Vanguard Group, the article states, uses a “harmonic mean” in calculating an average earnings figure for its funds’ price-earnings ratios. Meanwhile, State Street Global Advisors also uses a weighted harmonic-mean method to calculate its ETFs’ price-earnings ratios, but they exclude unprofitable companies.

All of this illustrates, if nothing else, that we shouldn’t base our investment decisions solely on a single statistic. In addition, and equally important, is the need to understand the statistics we are looking at before making any investment decision.