Authors: Sanjay Sehgal; Asheesh Pandey
Addresses: Department of Financial Studies, University of Delhi, Benito Juarez Marg, South Campus, Moti Bagh South, New Delhi, DL 110021, India ' Fortune Institute of International Business, Rao Tula Ram Marg, Basant Gaon, Vasant Vihar, New Delhi, DL 110057, India
Abstract: In this paper we examine if price multiples information can be used to develop profitable trading strategies. Data is employed for BSE 500 companies in India from July 2001 to April 2013. We find that, in general, low P/E, P/B and P/S stocks outperform high P/E, P/B and P/S stocks. Based on standalone price multiples, low P/B stock portfolio provide the highest return of 2.4% per month on risk adjusted basis. We observe that a combination of price multiples and their key value drivers does not provide trading strategies that outperform those based on standalone price multiples. Standard risk models like capital asset pricing model (CAPM) and Fama-French model are not able to explain cross-section of returns for price multiple sorted portfolios. Our findings are pertinent for market regulators', investment analysis as well as for academia. The study contributes to the equity valuation and asset pricing literature for emerging markets.
Keywords: relative valuation; price earning multiples; price to book value ratio; net profit margin; NPM; return on equity; ROE; profitability; trading strategies; India; price multiples; investment analysis; equity valuation; asset pricing; emerging markets.
Afro-Asian Journal of Finance and Accounting, 2014 Vol.4 No.4, pp.408 - 425
Available online: 20 Jan 2015 *Full-text access for editors Access for subscribers Purchase this article Comment on this article