Overview
I’m Howard Reisman the CEO of Stock Rover. In this video we are going to cover Stock Rover’s ratio charts.
So what is a ratio chart?
A Ratio Chart is a very lucid way to see how two different sets of time series data are trending against each other.
Basic Ratio Chart
So, let’s create a Ratio Chart to see exactly what this means. First, let’s just chart Google and Facebook for the last 5 years to see their performance. So, we select chart, type in Google, we add Facebook as a comparison ticker, and we change the time period to 5 years.
We can see they sort of run together, but with Facebook clearly outperforming Google over the five year period.
Now let’s generate a Ratio Chart. To do this we first select Technicals, and from the pull down we select Ratio Charts. We get this ratio chart dialog to fill in. We select Google as one ticker and Facebook as the other, the metric is already selected as price and we click OK to see the Ratio Chart.
In this chart it is easy to see that Facebook outperformed Google for about 3 ½ years until July 2017 there the momentum shifted to Google. The switch is not nearly as apparent in the pricing chart above. After 18 months of Google outperformance, it looks like there is another switch back to Facebook starting Jan 1 of 2019. So, like a tennis match, the momentum shifts back and forth between the companies for extended stretches of time.
So that is a basic ratio chart.
Advanced Ratio Charts
You can do much more with ratio charts. To change anything in a Ratio chart you can go back to the Technicals menu and reselect ratio charts, or you can click on the hamburger icon next to the chart.
Technicals
So, let’s add a simple moving average to the ratio chart.
We do this by clicking on the hamburger icon, selecting Change Ratio, clicking on Add Technicals, then just checking the Simple Moving Average box and clicking OK. Now the chart redraws with the Simple Moving Average lines of 50 and 150 days. We can also customize the Simple Moving Average. Let’s add a third line to the Simple Moving Average which is the 250-day trailing average price. Here you can see the chart redrawn with three simple moving average lines now, the 50, 150, and the 250.
Similarly, you can use the Exponential Moving Average. You can also create Bollinger Bands. Both can also be customized. For example, this is how we customize Bollinger Bands.
First, I will select the Ratio chart again, remove the Simple Moving Average technical, add the Bollinger Bands. You see by the default the moving average period is 20 days and the price deviation bands are two standard deviations. We are going to change the period to 50 day. Now you can see the chart redrawn with the 50-day moving average with two standard deviations width.
Let’s consider a practical example of where Ratio Charts can be helpful to investors. Let’s assume that I would like add an auto manufacturer in my portfolio and I am debating between GM or Ford. Let’s do a ratio chart on these two. Let’s remove the Bollinger Bands. Here we can see that clearly GM is outperforming Ford price wise and has been for a long time. Assuming the trend continues, you would clearly want to select GM, the only caveat is of course trends end when they end and unfortunately there is no reliable prediction for that.
Fundamentals
We can also do ratio chart on fundamentals. Let’s do two examples. First, we have seen GM is doing a lot better than Ford. But with that disparity over time, what about valuation. Has GM gotten too expensive relative to Ford? With Ratio charts we can answer that question. Let’s looks at GM vs. Ford in the price to earnings dimension.
So, to do that we go back to the Ratio dialog. Here we type in price and see price and change it to Price/Earnings and change it to Price/Earnings here and re-chart. Here we can see that if anything GM has become cheaper relative to Ford over time. So, valuation is not a cause for concern.
One ticker, two metrics
We can also do a ratio chart of a company against itself. Since we are interested in GM, let’s look at its debt per share vs. its price over time since debt is always a worry for auto manufacturers, especially in a rising interest rate environment.
So, we’ll go back to the Ratio Chart, select Change Ratio. Put GM but select debt per share as the numerator. Put GM in the denominator and leave it at price. Here we see that debt per share relative to price for General Motors has generally been increasing, which may be a cause of concern. Certainly, this is an area that would merit further research.
Conclusion
So, you can see that with a few quick clicks, you can generate ratio charts that can be highly illuminating in helping you make more informed investment decisions.
That completes the tour of ratio charts on Stock Rover. Be sure to check out our other Stock Rover videos on charting. Thank you for watching.
