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.
Major Themes in Economics
©2019 by Major Themes in Economics
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"Valuation Multiples: Identifying Undervalued Stocks From 1987 to 2017,"
Major Themes in Economics, 21, 15-28.
Available at: https://scholarworks.uni.edu/mtie/vol21/iss1/4