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.
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