One of the good things about a market rout is that everything seems to go down together, which means everyone managing their own retirement savings gets a free, or cheap, chance for a portfolio do-over.
The index is fine for many things, such as working out what is going on broadly with small-cap stocks. But it’s less good for us investors. That’s because it includes a vast number of unprofitable and speculative stocks that may, or may not, have any investment value at all. The basic yardstick used to value a stock is the price/earnings ratio, meaning the stock price divided by the net income per share.
The standard approach is simply to ignore all those companies losing money. That estimate of “10 times” trailing earnings, for example: As iShares says, that excludes the numbers for all the companies that are losing money. A spokeswoman for FTSE Russell, which manages the index, said: “We calculate P/E in different ways, and P/E ex Negative earnings is simply one calculated measure among many.” Fair enough. But investors should be aware that 40% of the stocks are unprofitable businesses.
But when our internal markets data team performed the same calculations for this index that they did for the Russell 2000, comparing the total market cap to the aggregate sum of all profits and losses, they found a trailing price to earnings ratio of 23.Is there a single right answer? Maybe not. Let the marketing teams have their day.
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Source: MarketWatch - 🏆 3. / 97 Read more »