ISSN (Print) : 2249-1880

SAMVAD: SIBM Pune Research Journal, Vol XV, 12-19, June 2018 ISSN (Online) : 2348-5329

A Comparative Study of Market Returns of Low P/E

Stocks V/S High P/E Stocks
Ritesh Ashok Khatwani, G Raghuram, Juhi Agrawal, Kishan Upadhyay
Symbiosis International University, Pune - 412115, Maharashtra, India; [email protected]
[email protected]
[email protected]
Flame University, Pune - 412115, Maharashtra, India; [email protected]

Abstract
Price to Earnings (PE) Ratio has been extensively used by financial (securities) analysts and investors as an investment
tool to pick which stocks to be bought. PE Ratio gains popularity among securities analysts and investors since it is easy
to calculate and understand. Thus far, many securities analysts, recommend investors to buy certain stocks if their PE
Ratio is low compared to their counterparts (Tseng, 1988). Stock with low PE ratio is perceived as having cheaper
current price hence expected to generate higher return in subsequent period.
Proponents of the P/E vis-à -vis stock returns have long claimed that lower P/E stocks signify higher market returns
(Basu, 1977). However, mixed results of the relationship between the P/E Ratio and stock return and the lack of a
consensus regarding the same show that there may be some inaccuracy with this claim.
The stocks to be used in the study are chosen from the BSE sectoral indices. We chose to select 10 stocks from each index
based on market capitalization and have grouped them into two categories, i.e. stocks having low P/E and stocks with
high P/E. This grouping is done on the basis of the average P/E for each index and the market return analysis will then be
carried out. The present paper tries to ascertain the notion that the returns performance of equity stocks is related to
their P/E ratios. The data, sample, and estimation procedures are outlined in the first part of the discussion. Empirical
results are discussed in the next section, and conclusions and implications of the study figure in the end.
1. Introduction over here is assumed to be the simplest and most
popular ratio used to predict the market (Johnston,
1966).
Efficient market hypothesis advocates that stock
*Author for prices fully reflect common information in an unbiased
correspondence and rapid fashion (Pettit R.R. & Westerfield R.
Today there is a high and increasing integration of September 1974). Researchers have provided a long list
investment and finance markets coupled with of arguments and finding that support or contradict the
increased regulation (Ball R. & Brown P. 1968). The efficient market hypothesis. Many researchers agree that
study of market trends and movements and its impact P/E ratios are reliable indicators of the future return’s
on economy and macroeconomic variables have potential of any stock. It Low P/E stocks are classified
become more important than ever before. Stock as value stocks and proponents of value investment
markets perform a vital role in any modern economy. believe that these tend to outperform high P/E stocks
The study of stock performance thus assumes great which are classified as growth stocks (Martin Leibowitz,
importance in order to channelize investor funds into Anthony Bova, 2014). Summing up, the prices of
productive avenues of equity returns. To accomplish securities may be biased, and P/E helps us to uncover
this important task, it becomes necessary to study this bias. It would thus be contradicting efficient market
equity market performance and its relationship with hypotheses if a finding claims that returns on low P/E
macroeconomics variables. Price-Earning (P/E) ratio equities tends to be higher than warranted by the
 A Comparative Study of Market Returns of Low P/E Stocks V/S High P/E Stocks
underlying risks (William Breen, 1968), even after which two buckets of equities were formed belonging to
adjusting for any additional search and transactions same sector. One bucket comprised of low P/E stocks
costs, and differential taxes. and other bucket comprised high P/E stocks.
2. Description of Problem The risk adjusted returns of these portfolios was then
compared in terms of pre specified measures.
Finally, as a test of the efficient market hypothesis,
Price to Earnings ratio (PE) is one of the most widely
the returns of the low P/E portfolio are compared to
used financial ratios by financial (securities) analysts
those of the index.
and investors as an investment tool to choose the right
mix of stocks or equities to buy (Fun L.P. & Basana
S.R., 2008). It has its popularity amongst the investor 4.1 Data Base and Sample Selection
class because of the simplicity in its calculation and The primary data used for the analysis is drawn from the
understanding. Most of the security analysts recommend following BSE sectoral indices:
investors to buy stocks with a low PE ratio when
compared to their counterparts. A stock with a low PE
1. S&P BSE BANKEX
ratio is perceived to have a lower current price as 2. S&P BSE Information Technology
compared to its intrinsic value and is thus expected to
3. S&P BSE Metal
generate a higher return in the near future.
Proponents of PE ratio vis-à-vis market returns have 4. S&P BSE Power
long claimed that lower PE stocks signify higher market 5. S&P BSE Fast Moving Consumer Goods
returns (Trevino, Robertson, 2002). However, there may
be some inaccuracy in this claim because of the mixed 6. S&P BSE Healthcare
relationship of PE ratio and stock returns as well as a 7. S&P BSE Auto
lack of consensus regarding the same. The stocks that
are to be used in this study are chosen from BSE 8. S&P BSE Oil & Gas
sectoral indices. We have decided to choose 10 stocks 9. S&P BSE PSU
from each of these indices and have grouped them into
10. S&P BSE Tech
two categories: stocks having a low PE ratio and stocks
having a high PE ratio. The market return analysis will 10 stocks are chosen from each index to form 2
be carried out on the basis of average PE for each index. buckets of 5 stocks each having a high and low P/E.
The average P/E ratio for the sectorial index was taken
into consideration while arriving at the portfolios for
3. Limitations of Study each individual index. Furthermore, the stocks
selected from each bucket had to fulfil the following
perquisite set of conditions:
The study only considers index stocks and is based on a. the firm actually traded on the SENSEX as of the
the performance of ten stocks comprising low and high beginning of the portfolio holding period.
P/E. Also, it restricts itself to Indian markets. The
b. the relevant investment return and financial
application of theory being generic, it may be applied to
statement data are not missing.
a variety of stocks in terms of size, sector, geography,
The data for annual returns for each individual
etc. Also, there is a possible correlation between returns
stock was taken for a period of 10 years 1 st April 2006
of stocks understudy as they belong to the same sector
- 31st March 2015 and corresponding returns for the
which may impact the result. This may be addressed if
corresponding sector indices was also obtained for the
an in-depth study is undertaken sector-wise.
given period.

4. Methodology 4.2 Analysis

Beginning April 1st, 2006, the returns for each
individual stock for every sub portfolio in the sectoral
In order to determine the relationship between Price indices were calculated on an annualized basis. Each
Earnings ratio and stock performance the following of these portfolios may be viewed as a mutual fund
steps were followed. A time length was defined for with a policy of acquiring securities in a given P/E

Vol XV | June
20 2018 SAMVAD: SIBM Pune Research Journal
 Ritesh Ashok Khatwani
class in one year, holding them for a year, and then
reinvesting proceeds from disposition in the same
class next year.
Although the construction of two portfolios is
arbitrary, that number was chosen simply to represent
two portfolios with a balance spread of high and low
P/E stocks within each sector index.
Since over 90% of firms release their financial
reports within three months of the fiscal year- end, the
P/E portfolios were assumed to be purchased on the
following April 1. The monthly returns on each of
these portfolios were then computed for the next
twelve months assuming an equal initial investment in
each of their respective securities and then a buy-
andhold policy
Results of the annual returns for each portfolio
were then compared with the BSE annual returns for

Table 1. BANKEX Stock Portfolios

the particular year and the value differential was used as
the basis for proving objective of the paper.
Another aspect used to verify our findings was the
use of hypothesis testing for correlation between the
portfolio P/E and annual returns. The data was fed into
statistical modelling software and was tested with the
following null hypothesis: The stocks with low P/E do
not generally give higher returns.
The hypothesis will be tested comparing the means
of the P/E ratio of the portfolios of the low and high P/E
stocks. The value of the means obtained will be the
determinant to either reject or accept the null hypothesis
and arrive at a conclusion regarding the relationship
between the market returns and stock P/E.
The test buckets considered were as follows:

Vol XV | June 2018 SAMVAD: SIBM Pune Research Journal 21

 A Comparative Study of Market Returns of Low P/E Stocks V/S High P/E Stocks
1. S&P BSE BANKEX (Bloomberg May-2018)
Low P/E Bracket (<12.20) High P/E Bracket (>12.20)

Company Name Mkt Cap (Rs. Cr.) P/E Ratio Company Name Mkt Cap (Rs. P/E Ratio
Cr.)
Canara Bank 11,953.95 5.25 Axis Bank 98,452.84 12.35
Federal Bank 9,039.90 10.67 Bank of Baroda 32,461.82 15.39
ICICI Bank 1,42,366.27 12.05 HDFC Bank 2,68,113.68 24.01
PNB 20,647.23 8.52 IndusInd Bank 56,233.41 27.74
SBI 1,62,203.23 11.41 Kotak Mahindra 1,27,323.34 72.75
Yes Bank 29,102.76 12.92

Table 2. FMCG Stock Portfolios (Bloomberg May-2018)

2. S&P BSE FMCG
Low P/E Bracket (<= 51.4) High P/E Bracket (> 51.4)

Company Name Mkt Cap (Rs. Cr.) P/E Ratio Company Name Mkt Cap (Rs. Cr.) P/E Ratio
Colgate 25,051.24 44.28 Britannia 34,733.00 54.71
Marico 29,280.44 49.88 Dabur India 47,496.81 57.04
HUL 1,79,071.13 41.69 Godrej Consumer 42,512.14 62.21
ITC 2,53,035.19 26.08 Jubilant Food 9,107.50 75.97
Tata Global Bev 8,876.01 32.25 Nestle 54,253.12 76.87
Table 3. Healthcare Stock Portfolios (Bloomberg May-2018)
3. S&P BSE Healthcare
Low P/E Bracket (<= 29.045) High P/E Bracket (> 29.045)

Company Name Mkt Cap (Rs. P/E Ratio Company Name Mkt Cap (Rs. Cr.) P/E Ratio
Cr.)
Biocon 9,445.00 13.15 Apollo Hospital 20,253.15 56.75
Cipla 45,785.34 28.43 Dr. Reddys Labs 53,042.77 30.03
Torrent Pharma 23,244.43 12.36 Lupin 81,161.36 38.38
Glenmark 20,735.80 12.71 GlaxoSmithKline 27,874.07 82.6
Cadila Health 33,455.91 17.82 Ipca Labs 7,815.51 97.84
Table 4. IT Stock Portfolios (Bloomberg May-2018)
4. S&P BSE Info Technology
Low P/E Bracket (<= 20.34) High P/E Bracket (> 20.34)

Company Name Mkt Cap (Rs. Cr.) P/E Ratio Company Name Mkt Cap (Rs. Cr.) P/E Ratio
HCL Tech 1,16,691.48 19.23 Hexaware Tech 7,251.08 22.06
Infosys 2,44,084.82 15.97 Mindtree 11,829.60 21.45
MphasiS 9,835.90 18.51 Oracle Fin Serv 31,450.75 33.22
Tech Mahindra 50,498.20 17.33 Vakrangee 9,403.13 27.3
Wipro 1,37,354.36 16.62 TCS 4,72,360.84 23.2
Table 5. Metal Stock Portfolios (Bloomberg May-2018)
5. S&P BSE Metal
Low P/E Bracket (<14.01) High P/E Bracket (>14.01)

Vol XV | June
20 2018 SAMVAD: SIBM Pune Research Journal
 Ritesh Ashok Khatwani
Company Name Mkt Cap (Rs. Cr.) P/E Ratio Company Name Mkt Cap (Rs. P/E Ratio
Cr.)
Hind Zinc 58,964.33 6.87 Coal India 2,00,134.01 16.62
NALCO 10,154.32 9.25 Hindalco 16,075.91 22.05
NMDC 34,889.50 7.33 JSW Steel 24,644.77 28.16
Tata Steel 24,474.63 4.48 Vedanta 25,214.72 17.32
Table 6. Auto Stock Portfolios (Bloomberg May-2018)
6. S&P BSE Auto
Low P/E Bracket (<29.44) High P/E Bracket (>29.44)

Company Name Mkt Cap (Rs. Cr.) P/E Ratio Company Name Mkt Cap (Rs. Cr.) P/E Ratio
Bajaj Auto 68,308.69 19.68 Ashok Leyland 22,592.30 31.90
Bharat Forge 17,979.51 23.36 Bosch 50,656.47 48.36
Exide Ind 10,616.50 18.21 Cummins 26,845.43 34.50
Hero Motocorp 51,480.44 19.94 Eicher Motors 49,226.14 56.55
M&M 75,608.68 23.13 Motherson Sumi 35,539.15 57.77
Maruti Suzuki 1,12,471.96 23.82

MRF 14,500.34 8.91

Tata Motors 1,14,519.32 16.60

Table 7. Power Stock Portfolios (Bloomberg May-2018)

7. S&P BSE Power
Low P/E Bracket (<52.63) High P/E Bracket (>52.03)

Company Name Mkt Cap (Rs. Cr.) P/E Ratio Company Name Mkt Cap (Rs. Cr.) P/E Ratio
Reliance Power Ltd 12,665.15 43.00 ABB India Ltd 24,328.24 95.52
Bharat Heavy Electricals
31,708.66 34.09 Siemens Ltd 37,335.65 60.88
Ltd
NTPC Ltd 1,03,892.80 9.92 GMR Infrastructure Ltd 7,212.95 398.33
Alstom T&D India Ltd 11,117.69 90.84
Tata Power Company Ltd 16.51
15,984.36 9,470.64
Thermax Ltd 28.99

Table 8. PSU Stock Portfolios (Bloomberg May-2018)

8. S&P BSE PSU
Low P/E Bracket (<16.08) High P/E Bracket (>16.08)

Company Name Mkt Cap (Rs. Cr.) P/E Company Name Mkt Cap (Rs. Cr.) P/E Ratio
Ratio
Allahabad Bank 3,128.92 4.53 BEML 4,293.55 81.96

Corporation Bk 3,926.34 6.71 Bharat Elec 29,608.80 23.03

NMDC 33,541.50 7.04 BHEL 32,504.13 34.95
NTPC 1,02,820.94 9.82 Container Corp 21,936.55 23.37
SBI 1,28,032.22 9 EngineersInd 6,059.80 20.53
Table 9. Oil and Gas Stock Portfolios (Bloomberg May-2018)
9. S&P BSE Oil and Gas

Vol XV | June 2018 SAMVAD: SIBM Pune Research Journal 21

 A Comparative Study of Market Returns of Low P/E Stocks V/S High P/E Stocks
Low P/E Bracket (<10.57) High P/E Bracket (>10.57)

Company Name Mkt Cap (Rs. P/E Ratio Company Name Mkt Cap (Rs. P/E Ratio
Cr.) Cr.)
BPCL 60,974.08 8.97 GAIL 43,318.50 21.88
HPCL 25,336.09 8.16 IGL 7,730.11 18.97
IOC 95,734.17 9.81 Reliance 3,14,990.53 11.96
Oil India 20,528.79 8.21 Petronet LNG 19,766.25 20.61
ONGC 1,88,178.01 10.57

Table 10. TECk Stock Portfolios (Bloomberg May-2018)

10. S&P BSE TECk
P/E Bracket (<20.79) High P/E (>20.79)

Company Name Mkt Cap (Rs. Cr.) P/E Ratio Company Name Mkt Cap (Rs. Cr.) P/E Ratio
Bharti Airtel 1,22,760.16 12.59 Bharti Infratel 69,171.45 41.44
DB Corp 5,892.48 19.7 Dish TV 8,564.22 25.27
Finolex Cables 3,460.25 17.47 Just Dial 4,020.85 26.17
HFCL 2,354.82 8.92 Oracle Fin Serv 30,972.49 32.17
HT Media 1,743.39 19.36 PVR 3,451.29 38.53
Idea Cellular 36,526.23 12.19 Tata Comm 10,744.50 28.3
Sun TV Network 13,810.70 16.59 TV18 Broadcast 6,891.73 55.07
Zee Entertain 39,133.48 47.38

5. Results High PE 25.05% 10 .089444

Total 21.71% 20 .089976
Figure 1. Auto Annualized Mean Returns. the annualized
The average returns of each of the above
returns for high P/E stocks which gave a return of
portfolios was calculated independent of the other
25.05% to the investors.
indices and the results thus obtained were tested
Hence the assumption that low P/E stocks give
statistically and the average returns of each of the
higher returns than High P/E stocks does not hold true
portfolios was matched with each other.
for the auto sector.
Upon comparing the results for the various indices
P value and statistical significance:
using graphical and statistical tools, we observed the
following results for each individual index: The two-tailed P value equals 0.5892
1. Auto By conventional criteria, this difference is
Based on the above analysis for the auto sector, we considered to be not statistically significant.
inferred that the average annualized returns for the Confidence interval:
stocks with low P/E stood at 18.37% from 2006 vis-à- The mean of Group One minus Group Two equals
vis 0.15865000 95% confidence interval of this difference:
From -0.44753777 to 0.76483777 Intermediate values
used in calculations: t = 0.5498 df = 18
standard error of difference = 0.289
2. BANKEX

S&P BSE Auto Annualized Returns

PE_Case Mean N Std. Deviation
Low PE 18.37% 10 .090803

Vol XV | June
20 2018 SAMVAD: SIBM Pune Research Journal
 Ritesh Ashok Khatwani
S&P BSE BANKEX vis the annualized returns for high P/E stocks which
PE_Case Mean N Std. Deviation gave a return of 14.39% to the investors.
Hence the assumption that low P/E stocks give
Low PE 8.28% 10 .112882
higher returns than High P/E stocks does not hold true
High PE 21.64% 10 .114653
for the FMCG sector.
Total 14.96% 20 .113701 P value and statistical significance
Figure 2. BANKEX Annualized Mean Returns. The two-tailed P value equals 0.7505 By
Based on the above analysis for the banking sector, conventional criteria, this difference is considered to
we inferred that the average annualized returns for the be not statistically significant.
stocks with low P/E stood at 8.28% from 2006 vis-à- Confidence interval
vis the annualized returns for high P/E stocks which The mean of Group One minus Group Two equals
gave a return of 21.6% to the investors. 0.00730000 95% confidence interval of this
Hence the assumption that low P/E stocks give difference:
higher returns than high P/E stocks does not hold true From -0.04020324 to 0.05480324
for the banking sector, but in fact high P/E stocks give Intermediate values used in
higher calculations t = 0.3229 df = 18
returns than Low P/E stocks standard error of difference = 0.023
P value and statistical significance
The two-tailed P value equals 0.0171 4. Healthcare
By conventional criteria, this difference is
considered to be statistically significant.
Confidence interval
The mean of Group One minus Group Two equals -
0.13360000 95% confidence interval of this difference:
From - 0.24049479 to -0.02670521
Intermediate values used in
calculations t = 2.6258 df = 18
standard error of difference = 0.051 S&P BSE Healthcare
3. FMCG PE_Case Mean N Std. Deviation
Low PE 19.27% 10 .070489
High PE 18.79% 10 .057187
Total 19.03% 20 .064033
Figure 4. Healthcare Annualized Mean Returns.

Based on the above analysis for the Healthcare

sector, we inferred that the average annualized returns
S&P BSE FMCG for the stocks with low P/E stood at 19.27% from
PE Case Mean N Std. Deviation 2006 vis-à-vis the annualized returns for high P/E
Low PE 15.12% 10 0.053296 stocks which gave a return of 18.79% to the investors.
High PE 14.39% 10 0.047665 Hence the assumption that low P/E stocks give
Total 14.76% 20 0.050442 higher returns than High P/E stocks does not hold true
Figure 3. FMCG Annualized Mean Returns. for the Healthcare sector.
P value and statistical significance
The two-tailed P value equals 0.7367 By
conventional criteria, this difference is considered to
Based on the above analysis for the FMCG sector,
be not statistically significant.
we inferred that the average annualized returns for the
stocks with low P/E stood at 15.12% from 2006 vis-à-

Vol XV | June 2018 SAMVAD: SIBM Pune Research Journal 21

 A Comparative Study of Market Returns of Low P/E Stocks V/S High P/E Stocks
Confidence interval stocks with low P/E stood at 13.38% from 2006 vis-à-
The mean of Group One minus Group Two equals vis
0.00980000 95% confidence interval of this
difference:
From -0.05050437 to 0.07010437
Intermediate values used in
calculations t = 0.3414 df = 18 standard
error of difference = 0.029
5. Information Technology

S&P BSE Metal

PE_Case Mean N Std. Deviation
Low PE 13.38 10 .131474

High PE 10.94 10 .107342

Total 12.16 20 .119740
Figure 6. Metal Annualized Mean Returns.
S&P BSE Information Technology
the annualized returns for high P/E stocks which gave a
PE_Case Mean N Std. Deviation
return of 10.94% to the investors.
Low PE 19.86% 10 .088537 Hence the assumption that low P/E stocks give
High PE 18.83% 10 .099071 higher returns than High P/E stocks does not hold true
Total 19.35% 20 .093732 for the Metal sector.
Figure 5. IT Annualized Mean Returns. P value and statistical significance
The two-tailed P value equals 0.6548 By
conventional criteria, this difference is considered to be
Based on the above analysis for the IT sector, we not statistically significant.
inferred that the average annualized returns for the Confidence interval
stocks with low P/E stood at 19.86% from 2006 vis-à- The mean of Group One minus Group Two equals
vis the annualized returns for high P/E stocks which 0.02440000 95% confidence interval of this difference:
gave a return of 18.83% to the investors.
From -0.08836247 to 0.13716247
Hence the assumption that low P/E stocks give Intermediate values used in
higher returns than High P/E stocks does not hold true
calculations t = 0.4546 df = 18
for the IT sector.
standard error of difference = 0.054
P value and statistical significance
The two-tailed P value equals 0.8091 By 7. Power
conventional criteria, this difference is considered to be
Based on the above analysis for the Power sector, we
not statistically significant.
inferred that the average annualized returns for the
Confidence interval
stocks with low P/E stood at 6.94% from 2006 vis-à-vis
The mean of Group One minus Group Two equals
the annualized returns for high P/E stocks which gave a
0.01030000 95% confidence interval of this difference:
return of 6.61% to the investors.
From -0.07797344 to 0.09857344
Although the returns of both the portfolios are
Intermediate values used in
comparable, however, the value for low P/E is higher
calculations t = 0.2451 df = 18 than that of the High P/E. Hence the assumption that
standard error of difference = 0.042 low P/E stocks give higher returns than High P/E stocks
6. Metal does not hold true for the Power sector.
Based on the above analysis for the Metal sector, we
inferred that the average annualized returns for the

Vol XV | June
20 2018 SAMVAD: SIBM Pune Research Journal
 Ritesh Ashok Khatwani
P value and statistical significance Hence the assumption that low P/E stocks give
higher returns than High P/E stocks does not hold true
for the PSU sector.
P value and statistical significance
The two-tailed P value equals 0.7917 By
conventional criteria, this difference is considered to
be not statistically significant.
Confidence interval
The mean of Group One minus Group Two equals
S&P BSE Power 0.01330000 95% confidence interval of this
PE_Case Mean N Std. Deviation difference:
From -0.09096247 to 0.11756247
Low PE 6.94% 10 .106713
Intermediate values used in
High PE 6.61% 10 .117548 calculations t = 0.2680 df = 18
Total 6.77% 20 .111998 standard error of difference = 0.050
Figure 7. Power Annualized Mean Returns.
9. Oil & Gas
The two-tailed P value equals 0.9530 By
conventional criteria, this difference is considered
to be not statistically significant.
Confidence interval
The mean of Group One minus Group Two
equals 0.00300000 95% confidence interval of this
difference:
From -0.10247392 to 0.10847392
S&P BSE Oil and Gas
Intermediate values used in
PE_Case Mean N Std. Deviation
calculations t = 0.0598 df = 18
standard error of difference = 0.050 Low PE 11.86% 10 .102607
High PE 10.02% 10 .078881
8. PSU
Total 10.94% 20 .091305
Figure 9. Oil & Gas Annualized Mean Returns.

Based on the above analysis for the Oil and Gas

sector, we inferred that the average annualized returns
for the stocks with low P/E stood at 11.86% from
2006 vis-à-vis the annualized returns for high P/E
S&P BSE PSU
stocks which gave a return of 10.02% to the investors.
PE_Case Mean N Std. Deviation
Hence the assumption that low P/E stocks give
Low PE .00884 10 .115135 higher returns than High P/E stocks does not hold true
High PE .00751 10 .106641 for the Oil and Gas sector.
Total .00817 20 .110711 P value and statistical significance
Figure 8. PSU Annualized Mean Returns. The two-tailed P value equals 0.6584 By
conventional criteria, this difference is considered to
be not statistically significant.
Based on the above analysis for the PSU sector, we Confidence interval
inferred that the average annualized returns for the The mean of Group One minus Group Two equals
stocks with low P/E stood at 8.84% from 2006 vis-à- 0.01840000 95% confidence interval of this difference:
vis the annualized returns for high P/E stocks which
gave a return of 7.51% to the investors.

Vol XV | June 2018 SAMVAD: SIBM Pune Research Journal 21

 A Comparative Study of Market Returns of Low P/E Stocks V/S High P/E Stocks
From -0.06758503 to 0.10438503 investor expectations, may be indicators of future
Intermediate values used in investment performance.
calculations t = 0.4496 df = 18 The results reported in this paper are inconsistent
standard error of difference = 0.041 with the view that P/E ratio information was not “fully
reflected” in security prices in as rapid a manner as
10. TECk
postulated by the semi-strong form of the efficient
market hypothesis (Latane H.A. & Young W.E.
September 1969). Instead, it seems that equilibria
persisted in capital markets during the period studied
barring banking segment.
Furthermore, the tests and the analysis was carried
out with the assumption that the stocks have no
significant correlation amongst themselves and that the
returns of each individual stock in the 3 portfolios for
S&P BSE TECk
each of the individual indices are independent of each
PE_Case Mean N Std. Deviation
other.
Low PE .00940 10 .098626 This assumption, however, is not true in its entirety
High PE .00724 10 .093554 and there exists a correlation within cross sector stocks,
Total .00832 20 .095904 which may have an inherent impact on the overall
Figure 10. TECk Annualized Mean Returns. returns of an individual portfolio.
In conclusion, the behavior of security prices over
the 10-year period studied is, perhaps, not completely
Based on the above analysis for the Technology described by the efficient market hypothesis. Though
sector, we inferred that the average annualized returns the low P/E portfolios did not earn superior returns on a
for the stocks with low P/E stood at 9.40% from 2006 riskadjusted basis for most of the indices, the
vis-à-vis the annualized returns for high P/E stocks propositions of the price-ratio hypothesis on the
which gave a return of 7.24% to the investors. relationship between investment performance of equity
Hence the assumption that low P/E stocks give securities and their P/E ratios seem to be invalid.
higher returns than High P/E stocks does not hold true Contrary to the growing belief that publicly available
for the Oil and Gas sector. information is instantaneously impounded in security
P value and statistical significance prices, there seem to be lags and frictions in the
The two-tailed P value equals 0.6214 By adjustment process. As a result, publicly available P/E
conventional criteria, this difference is considered to be ratios seem to possess “information content” and may
not statistically significant. warrant an investor’s attention at the time of portfolio
Confidence interval formation or revision.
The mean of Group One minus Group Two equals Furthermore, although the results obtained in most
0.02160000 95% confidence interval of this difference: of the individual indices were out of line with the
hypothesis that Low P/E stocks deliver greater returns
From -0.06871389 to 0.11191389
than High P/E stocks, there were instances like the
Intermediate values used in
BANKEX index where this hypothesis failed.
calculations t = 0.5025 df = 18
Additionally, the returns of the portfolios in the
standard error of difference = 0.043 Power sector are almost comparable. This can be
6. Conclusion attributed to the fact that we have typically considered
only 5-7 stocks in each individual test bracket for
every index and this may lead to the data being
In this paper an attempt was made to determine slightly distorted in nature.
empirically the relationship between investment
performance of equity securities and their P/E ratios.
While the efficient market hypothesis denies the 7. References
possibility of earning excess returns, the price-ratio
hypothesis asserts that P/E ratios, due to exaggerated

Vol XV | June
20 2018 SAMVAD: SIBM Pune Research Journal
 Ritesh Ashok Khatwani
1. Ball R. & Brown P. (Autumn 1968). An Empirical
Evaluation of Accounting Income Numbers. Journal
of Accounting Research, 159-178.
2. Pettit R.R. & Westerfield R. (September 1974). Using
the capital asset pricing model and the market model to
predict security returns. Journal of Financial and
Quantitative Analysis, 579-605.
3. Basu S. (Jun 1977). Investment performance of
common stocks in relation to their price-earnings
ratios: A test of the efficient market hypothesis.
Journal of Finance, 32(3), 663-682.
4. Leibowitz M. & Bova A. (May 2014) Portfolio
strategy- P/Ebased horizon returns. Morgan Stanley
and Co. Research
5. Fun L.P. & Basana S.R. (Feb, 2008) Price earnings
ratio and stock return analysis. Faculty of Economics,
Petra Christian University
6. Tseng K.C. 1988. Low Price, price-earnings ratio,
market value, and abnormal stocks return. The
Financial Review, 23(3), 333-344.
7. Trevino R. & Robertson, F. (2002). P/E ratios and
stock market returns. Journal of Financial Planning,
15(2), 76-84.
8. Johnston JK. (May-June 1966). Econometric methods,
2nd Ed. (New York: McGraw Hill, 1972 James D.
McWilliams. Prices, Earnings and P. E. Ratios,
Financial Analysts Journal.
9. Latane H.A. & Young W.E. (September 1969). Test of
portfolio building rules. Journal of Finance.
10. Breen W. (July-August 1968). Low price-earnings
ratios and industry relatives. Financial Analysts
Journal.

Vol XV | June 2018 SAMVAD: SIBM Pune Research Journal 21