The Efficiency of Individual and Composite Measures for Identifying Value Stocks

Abstract

We determined whether there is a significant value premium for a broad cross-section of tradable U.S. stocks, examined the relative efficiency of individual value measures, and investigated whether composite value measures can be used to enhance the performance of value portfolios. Our results show that value portfolios dominate growth portfolios. Among portfolios based on individual valuation ratios, low-P/S provides the highest excess returns, while low-P/C offers the lowest risk and best risk-return tradeoff. However, using composite value measures expands the set of efficient portfolios, enabling investors to achieve a wider range of risk-return tradeoffs.

Keywords: value premium, price/earnings, price/sales, price/cash flow, market/book, portfolio

JEL Classification: G11, G14