In this article we will explain a charting method called rebasing. This can be used to compare price performance of companies especiall when price levels are different.
Rebasing is a quite important ‘technique’ to analyze and display stock price histories. To understand the importance of rebasing, let’s have a look at the chart below which shows the price history of Hewlett-Packard and Home Depo:
These two companies’ prices are moving at a totally different price range. Hewlett’s price is in range $40-$50 while Home Depo is moving between $20 and $30. So generally Hewlett Packard’s price level is around 2 times higher then Home Depo’s price level. Why is this important to us? Because as a consequence a $3 change in the price means 2 times smaller effect on Hewlett Packard then Home Depo. Look at the two circles in the above chart: it looks like as if both company had fallen by the same size. However in this time Hewlett Packard has fallen from $46.13 to $43, this is a 6.7% fall. In the second circle Home Depo has fallen from $30.45 to $27.65. This is a -$2.8 change (pretty similar to Hewlett Packard’s $3.13 fall) but in percentage terms it’s a 9.1% fall. The effect of $3 dollar change is bigger for Home Depo then for Hewlett Packarsd as we compare it to the lower price level ($30). So the normal chart does not show what the impact of a $3 price change really means for the two companies.
To avoid this misleading charting when comparing companies at a different price level, we can use rebasing. A rebase chart shows not an absolute price change but it displays at each point of time how much percentage the price changed from a selected date in the past. (called rebase date). In this way we can compare the performance of companies at a different price level. Actually rebasing is a very simple index calculation:
where
RBt = rebased price at time t
Pt = price at the t
P0 = price at the rebase date
As Pt = P0 when t=0, so at the rebase date the rebased price always equals to 100.
If the price has doubled from the rebase date then the rebased price will be 200.
Let’s have a look at the rebased price history of the two companies:
You can clearly see that the effect was bigger for Home Depo than for Hewlet Packard. There’s one more additonal informatio you can read out from the rebased chart: if you have a look at 11th of March, you can see that the rebased value is almost the same for both companies around 96.5. This means that the two companies performance (-4.5%) was almost the same if we consider the period from the beginning of 2008 to mid March. You will never be able to realize this when looking at the first raw price history chart at 11th March.
You can find a simple example spreadsheet about rebasing in the Financial Link/Library/Examples menu of Financial Link Excel Add-in.
