PE Growth and Risk: Evidences from Value Investing in Thailand

Paiboon Sareewiwatthana

School of Business, National Institute of Development Administration, Bangkok, Thailand.

DOI: 10.4236/ti.2014.52012                

Abstract

This study employed the concept of value investing, whereby PE, PEG, and PERG ratios were used for stock screening. PE is the basic price to earnings ratio; while PEG is the PE with growth incorporated. PERG is the PEG adjusted for risk factor. The concepts based on the hypotheses that stocks with low PE ratio, low PEG, and low PERG should generate higher returns than those of the market average. Data from the Securities Exchange of Thailand during 2002-2012 were used to test the hypotheses. Returns from portfolios with low PE, low PEG, and low PERG were computed and found to be better than those of the market average. Proxies for risk, the standard deviation of return and the beta coefficients, were used to computed PERG. Portfolios of low PERG using Standard Deviation as risk proxy appeared to provide better performances than those of using beta coefficient. All in all, PE appeared to be the best screening, providing the highest returns during the period tested.

Keywords

Value Investing, PE, PEG, PERG, The Stock Exchange of Thailand

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	Schatzberg, J.D. and Vora, G. (2009) PEG Investing Strategy: A Revisit. Quarterly Journal of Finance and Accounting, 48, 5-22.
[2]	Robichek, A. and Bogue, M. (1971) A Note on the Behavior of Expected Price/Earnings Ratios over Time. Journal of Finance, 26, 731-735. http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1971.tb01726.x/abstract http://dx.doi.org/10.1111/j.1540-6261.1971.tb01726.x
[3]	Reinganum, M. (1981) A Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earnings Yields and Market Values. Journal of Financial Economics, 9, 19-46. http://www.sciencedirect.com/science/article/pii/0304405X81900192 http://dx.doi.org/10.1016/0304-405X(81)90019-2
[4]	Fama, E.F. and French, K.R. (1993) Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics, 33, 3-56. http://www.sciencedirect.com/science/article/pii/0304405X93900235 http://dx.doi.org/10.1016/0304-405X(93)90023-5
[5]	Fama, E.F. and French, K.R. (1996) Multifactor Explanations of Asset Pricing Anomalies. Journal of Finance, 51, 55-84. http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1996.tb05202.x/abstract http://dx.doi.org/10.1111/j.1540-6261.1996.tb05202.x
[6]	Petkova, R. and Zhang, L. (2005) Is Value Riskier than Growth? Journal of Financial Economics, 78, 187-202. http://dx.doi.org/10.1016/j.jfineco.2004.12.001
[7]	Holt, C.C. (1962) The Influence of Growth Duration on Share Prices. Journal of Finance, 17, 465-475. http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1962.tb04300.x/abstract
[8]	Malkiel, B. (1963) Equity Yields, Growth, and the Structure of Share Prices. American Economic Review, 53, 10041031.
[9]	Easton, P. (2004) PE Ratios, PEG Ratios, and Estimating the Implied Expected Rate of Return on Equity Capital. The Accounting Review, 79, 73-95. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=423601 http://dx.doi.org/10.2308/accr.2004.79.1.73
[10]	Estrada, J. (2005) Adjusting P/E Ratios by Growth and Risk: The PERG Ratio. International Journal of Managerial Finance, 1, 187-203. http://www.emeraldinsight.com/journals.htm?articleid=1523923&show=pdf http://dx.doi.org/10.1108/17439130510619631
[11]	Sareewiwatthana, P. (2011) Value Investing in Thailand: The Test of Basic Screening Rules. International Review of Business Research Papers, 7, 1-13. http://www.bizresearchpapers.com/1.%20Paiboon.pdf
[12]	Maneesilasan, N. (2011) GARP Investing in Thailand. Unpublished, National Institute of Development Administration, Bangkok.
[13]	Sareewiwatthana, P. (2012) Value Investing in Thailand: Evidence from the Use of PEG. Technology and Investment, 3, 113-120. http://www.scirp.org/journal/PaperInformation.aspx?paperID=19395#.U0_q4VWSxpw
[14]	Panyagometh, K. (2012) Weight and Stock Selections for Equity Portfolio Management: Evidence from the Stock Exchange of Thailand. Business and Management Review, 2, 20-27. http://www.businessjournalz.org/articlepdf/BMR-2701Sep2(7)12c.pdf
[15]	Sareewiwatthana, P. (2013) Common Financial Ratios and Value Investing in Thailand. Journal of Finance and Investment Analysis, 2, 69-85. http://www.scienpress.com/Upload/JFIA/Vol%202_3_6.pdf
[16]	Sharpe, W.F. (1966) Mutual Fund Performance. The Journal of Business, 39, 119-138. http://dx.doi.org/10.1086/294846
[17]	Chunhachinda, P., Dandapani, K., Hamid, S. and Prakash, A.J. (1997) Portfolio Selection and Skewness: Evidence from International Stock Markets. Journal of Banking & Finance, 21, 143-167. http://www.sciencedirect.com/science/article/pii/S0378426696000325 http://dx.doi.org/10.1016/S0378-4266(96)00032-5
[18]	Tang, G.Y.N. and Shum, W.C. (2003) The Relationships between Unsystematic Risk, Skewness and Stock Returns During up and down Markets. International Business Review, 12, 523-541. http://www.sciencedirect.com/science/article/pii/S096959310300074X http://dx.doi.org/10.1016/S0969-5931(03)00074-X