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Written and copyright © 2008-2011 by Thomas N. Bulkowski. All rights reserved.
This page reviews results from a study of price to earnings ratio.
P/E Ratio Summary
The price to earnings ratio is perhaps the most widely followed and used financial ratio.
A study of the P/E ratio (price divided by earnings), shows that stocks with P/E ratios below the median of all stocks studied outperformed those with higher P/E ratios 71% of the time.
In other words, if you bought a stock with a low P/E ratio and held it for 1 to 5 years, you would have made money 71% of the time when compared to stocks with
higher P/E ratios. The finding that low P/E stocks outperform agrees with common investment knowledge.
P/E Ratio Methodology
I used the Value Line investment survey and typed in their average annual P/E ratio to build a database of 178 stocks with data ranging from 12/30/1991 to 7/11/2008. Value Line
calculated the "Average Annual P/E ratio" by "dividing the average price for a year with the actual reported earnings for that year.
After completing the database, I logged the close-to-close price change from 1 to 5 years out, looking
forward from the base year. The base year ranged from 1992 to 2006. Not all stocks covered the entire range and some years did not have earnings to report, so they had no P/E ratio.
Years with no P/E ratio were excluded. The price change measured from the close on the last trading day of each year unless the value was unavailable (in which case, I used the start
of the new year). Years 2008 and later are not included since the year has not completed yet.
For example, in 1992, I found the median P/E ratio to be 17.05 then I logged the 1 year price change (end 1992 to end 1993) for stocks with P/E ratios above and below the median.
Stocks with P/E ratios
below the median showed average rises of 9.9% compared to rises of 1.6% for high P/E stocks. I then looked at the average price change over 2 years (end 1992 to end 1994). The low P/E stocks dropped
an average of 3.8% compared to a loss of 4.7% for higher P/E stocks. And so on, up to 5 years. Then I changed the base year to 1993 and conducted the same experiments. The results
are shown in the next section.
P/E Ratio Results
The following table shows the results.
| Base Year | P/E | Median P/E | 1 year | 2 years | 3 years | 4 years | 5 years | Samples |
| 1992 | High | 17.05 | 1.6% | -4.7% | 3.445% | 12.1% | 16.8% | 29 |
| Low | | 9.9% | -3.8% | 3.442% | 14.2% | 21.0% | 29 |
| 1993 | High | 18.9 | -19.6% | -1.0% | 13.8% | 19.7% | 7.4% | 34 |
| Low | | -3.6% | 7.9% | 18.1% | 25.6% | 21.3% | 32 |
| 1994 | High | 18.3 | 20.3% | 33.5% | 34.9% | 19.1% | 22.2% | 34 |
| Low | | 21.6% | 31.8% | 38.5% | 25.9% | 24.7% | 34 |
| 1995 | High | 17.5 | 38.9% | 39.4% | 21.0% | 24.1% | 24.8% | 35 |
| Low | | 36.0% | 39.3% | 19.7% | 16.1% | 15.8% | 35 |
| 1996 | High | 18.4 | 27.5% | 3.9% | 10.8% | 15.0% | 8.4% | 41 |
| Low | | 35.1% | 7.5% | 5.9% | 8.5% | 9.3% | 43 |
| 1997 | High | 18.7 | -7.4% | 2.1% | 7.3% | 4.7% | 1.9% | 44 |
| Low | | -21.5% | -4.9% | 1.7% | 1.9% | -0.7% | 46 |
| 1998 | High | 18.2 | 16.6% | 7.5% | 8.6% | 1.6% | 8.3% | 58 |
| Low | | 24.0% | 22.7% | 14.1% | 8.9% | 15.0% | 59 |
| 1999 | High | 18.6 | 4.2% | 3.5% | -3.6% | 4.4% | 8.1% | 58 |
| Low | | 15.9% | 14.8% | 8.1% | 18.0% | 22.4% | 58 |
| 2000 | High | 15.3 | -0.6% | -8.7% | 2.1% | 5.8% | 9.5% | 62 |
| Low | | 8.2% | 2.1% | 14.5% | 20.4% | 20.3% | 64 |
| 2001 | High | 19 | -15.6% | 4.1% | 8.2% | 11.1% | 12.2% | 62 |
| Low | | -3.9% | 14.8% | 22.8% | 22.6% | 24.6% | 63 |
| 2002 | High | 18.65 | 25.9% | 24.4% | 24.0% | 22.6% | 23.4% | 65 |
| Low | | 43.1% | 42.3% | 34.5% | 34.8% | 23.7% | 65 |
| 2003 | High | 17.2 | 16.4% | 16.7% | 15.7% | 14.1% | | 69 |
| Low | | 28.0% | 20.4% | 21.4% | 16.2% | | 69 |
| 2004 | High | 18.95 | 24.5% | 18.8% | 20.4% | | | 74 |
| Low | | 9.6% | 14.1% | 7.6% | | | 74 |
| 2005 | High | 18.3 | 12.0% | 16.7% | | | | 77 |
| Low | | 16.7% | 5.7% | | | | 81 |
| 2006 | High | 17.35 | 15.6% | | | | | 79 |
| Low | | 2.9% | | | | | 79 |
Yes, I know. I dislike long tables, too. Let’s take an example using 2006. Stocks with a P/E ratio above the median of 17.35 had gains averaging 15.6% in 2007 compared
to gains of 2.9% for stocks with P/Es at or below the median 17.35. No more results appear for that row because the years had not ended when the study was done. There were 79 samples
that qualified for the study.
Years that performed poorly are 1995 (0% winners), 1996 (66% winners), 1997 (0%), 2004 (0%), 2005 (50%) and 2006 (0%). Years 2004 and more recent have fewer completed entries, as the
table shows. The low sample counts may be responsible for the performance.
I consider these results preliminary since I intend to expand the database and then publish my findings.
-- Thomas Bulkowski
Copyright © 2008-2011 by Thomas N. Bulkowski. All rights reserved. How was Colonel Sanders a typical male? All he cared about were legs, breasts, and thighs.
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