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Document Type

Article

Abstract

This research reports the absolute returns and alpha generated by hypothetical portfolios arranged by six commonly used valuation multiples from 1987 to 2017. I find the best returns are offered by the Sales/TEV multiple while the FCF/TEV multiple generates the most Fama-French Three-Factor alpha. My results contradict two prior claims by Fama and French: 1. any valuation multiple is as good as another and 2. book value-to-market value is the preferred measure for identifying undervalued companies. I also examine the performance of each valuation multiple for small, mid, and large-cap companies and find that smaller stocks offer greater investment returns than larger stocks.

Publication Date

Spring 2019

Journal Title

Major Themes in Economics

Volume

21

Issue

1

First Page

15

Last Page

28

Copyright

©2019 by Major Themes in Economics

Language

en

File Format

application/pdf

Included in

Economics Commons

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