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Strategies & Market Trends : Stock Attack II - A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Mark L. who wrote (14706)	8/12/2001 8:11:26 AM
From: jeffsthoughts	Read Replies (2) \| Respond to of 52237

Mark, That brings up an interesting question that I never thought about. How do companies without earnings (and hence no PE) figure into PE estimates for the indexes? A situation where no company was making money would result in an incalculable PE for an index wouldn't it? Here is the problem I don't understand the answer to: If 10% of the companies in the S&P that previously had earnings and thus PE ratios, suddenly found themselves losing money, what happens to the PE for the S&P 500? If these were all previously high PE companies, we can't suddenly ignore them in the calculation because their elimination from the calculations would lower the PE ratio for the index wouldn't it? Conversely, what happens when a bunch of companies that were losing money suddenly start to creep back into the black (let's say they make a penny), and their initial PE is something like 2000 or so? Wouldn't a return to profitability result in a higher PE for the index under fundamentally improving conditions? Wouldn't this confusion alone make it necessary to use forward PE only for historical comparisons and future predictive value? How is this problem with figuring PE for an index dealt with? Jeff