Another Look at the Relationship between Portfolio Returns and Market Multiples

Abstract

Equity investors are always interested in identifying profitable trading strategies. The price-to-earnings ratio (P/E) and price-to-sales ratio (P/S) are two simple metrics that researchers have reported may meet this objective under particular market conditions. During our study period, which is longer in duration than most of the previous works, the performance of portfolios based on P/S dominated those based on P/E. However, portfolios based upon the combination of low P/E and net profit momentum outperformed all other strategies tested. Another way the predictive power of P/E may be improved is by dividing it by a measure of the firm's earnings growth, yielding a composite metric known as the price-to-earnings-to-earnings growth ratio (PEG). This metric has gained the attention of professional investors and researchers. Because many investors prefer P/S over P/E, it is surprising that a counterpart to PEG has not gained similar traction. Our results provide evidence that helps explain why the price-to-sales-to-sales growth ratio (PSG) has failed to gain attention. Our results also indicate that none of these market multiples alone can be employed to provide consistently profitable investment performance.

Zombie Companies in Business Environment in Emerging Economies: Case of Turkey

“…As mentioned before, zombie companies are particularly dependent on banks for financing, which is essentially not more than a life support for them, and this is referred to as "the living dead" or "zombie stocks" for banks (Akhbari et al, 2020). These companies in most cases do not start off their business as zombies, they turn into zombie companies over time and there are many reasons why they end up as such (Banerjee & Hofmann, 2018).…”

Financial Factors Affecting Price-to-Earnings Ratios in Canada

“…The country source of company data spans the globe. Numerous researchers have examined determinants of the P/E including: Pakistan (Afza & Tahir, 2012;Akhtar & Rashid, 2015); Turkey (Arslan, Iltas & Kayhan, 2017;Sezgin, 2010); Japan (Constand, Freitas & Sullivan, 1991;Marozzi & Cozzucoli, 2016); Philippines (Divanbeygi & Tehrani, 2013); Bangladesh (Dutta, Saha, & Das, 2018); Iran (Faezinia, Ohadi & Janani, 2012); Jordan (Fesokh & Haddad, 2019); G7 countries (Rahman & Shamsuddin, 2019); Indonesia (Idrus, Ali & Jusni, 2015); Nigeria (Ikoku, Hosseini & Okany, 2010); Norway (Itemgenova & Sikveland, 2020); India (Kumar& Warne, 2009); Poland (Kurach & Slonski, 2015); Global collection of Austria, Denmark, Japan, Mexico, Netherland, Norway, Spain, Sweden, and the UK (Nikbakht & Polat, 1998); China (Marozzi & Cozzucoli, 2016); Emerging Equities Markets (Ramcharran, 2002): and the US (Basu (1977), Beaver & Morse (1978), Bodhanwal (2014), Goodell & Bodey (2012), Houmes & Chira (2015), Jordan, Clark & Donald (2009), Penman (1966). The change to IFRS and its impact on financial ratios affecting the P/E ratio has been studied by Cengiz (2014), Lantto & Sahlstrom (2009), and Lueg, Punda & Burkert (2014).…”

“…As Basu (1977) has mentioned, "publicly available P/E ratios seem to possess 'information content' and may warrant an investor's attention at the time of portfolio formation or revision." The relationship between stocks and the P/E ratios was examined by the following authors McWilliams' (1966), Basu (1977), Ikoku, Hosseini, & Okany (2010), Sezgin (2010), Bodhanwala (2014), Akhtar (2015), and Chhaya & Nigam (2015), among others. Their studies show that better investment performance can be obtained from a portfolio comprised of low P/E ratio stocks in contrast to portfolios made up of high P/E ratio stocks.…”