Abstract
The choice of selecting value or growth stocks for investment with the aim of maximising returns is referred to as “Value Investing”, and to a rational investor, selecting between these stocks are based on but not limited to, factors such as P/E, P/B and P/CF multiples. There is an underlying philosophy that value stocks are firms with low multiples and always outperform firms with high multiples, referred to as growth stocks. The current study covers a period from 1992 to 2017 and includes stocks that have existed for this period in the Top 40 Index on the Johannesburg Stock Exchange (JSE) and in the FTSE 100 on the London Stock Exchange (LSE). As the sample period includes the Global Financial Crisis (GFC), the study is further divided into periods before, during, and after the GFC. Two distinct portfolios based on each multiple were created for value and growth stocks in the respective markets in order to examine average portfolio performance for each sample period. Performance analysis was done based on both average total return and average risk-adjusted returns to determine if a value premium, (where value portfolios outperform growth portfolios)exists. In addition, abnormal returns produced by these multiples in each market were compared based on statistical significance to determine which multiples have a high explanatory power and is the most profitable in forming portfolios. Results indicated that there is no outright set of stocks in these markets that can always produce a value premium. In both markets, for periods that exceeded ten years, statistically significant abnormal returns were obtained for the value portfolio, and therefore, a value premium was found to exist. Furthermore, the findings revealed that the price to cash flow (P/CF) ratio is best to use as a basis of portfolio formation for both markets.
M.Com. (Investment Management)