Extreme Returns from Extreme Value Stocks: Enhancing the Value Premium

21 Pages Posted: 9 Jun 2005

See all articles by Keith P. Anderson

Keith P. Anderson

The York Management School

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Date Written: April 2005

Abstract

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 to be found 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 are 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 a more judicious use of the P/E ratio, we can considerably enhance the value premium.

Keywords: Value premium, price-earnings ratio, price-earnings ratio, UK stock returns

JEL Classification: G11, G12, G14

Suggested Citation

Anderson, Keith P. and Brooks, Chris, Extreme Returns from Extreme Value Stocks: Enhancing the Value Premium (April 2005). Available at SSRN: https://ssrn.com/abstract=739667 or http://dx.doi.org/10.2139/ssrn.739667

Keith P. Anderson

The York Management School ( email )

York YO10 5DD
United Kingdom

Chris Brooks (Contact Author)

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

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