RT Journal Article
SR Electronic
T1 Extreme Returns From Extreme Value Stocks
JF The Journal of Investing
FD Institutional Investor Journals
SP 69
OP 81
DO 10.3905/joi.2007.681825
VO 16
IS 1
A1 Keith Anderson
A1 Chris Brooks
YR 2007
UL https://pm-research.com/content/16/1/69.abstract
AB Investigations into value-based ‘anomalies’ such as the P/E effect typically sort shares into quintiles, or at most deciles. These are blunt instruments. We test whether most of the extra value in the lower end of the P/E spectrum is to be found in the very lowest P/E shares, and whether the worst investments reside in the few shares with the highest P/E. Using a long-term definition of earnings, and attributing influences on the P/E to company size and sector, we find that small portfolios of value shares give returns of 40%+ per annum, while small portfolios of glamour shares give returns less than the risk-free rate. We thus show that by more judicious use of the P/E ratio, we can considerably enhance the value premium.TOPICS: Style investing, portfolio construction, equity portfolio management