Asheesh Pandey

Profitable trading strategies based on price multiple information: evidence from India

In this paper we examine if price multiples information can be used to develop profitable trading strategies. Data is employed for BSE 500 companies in India from July 2001 to April 2013. We find that, in general, low P/E, P/B and P/S stocks outperform high P/E, P/B and P/S stocks. Based on standalone price multiples, low P/B stock portfolio provide the highest return of 2.4% per month on risk adjusted basis. We observe that a combination of price multiples and their key value drivers does not provide trading strategies that outperform those based on standalone price multiples. Standard risk models like capital asset pricing model (CAPM) and Fama-French model are not able to explain cross-section of returns for price multiple sorted portfolios. Our findings are pertinent for market regulators’, investment analysis as well as for academia. The study contributes to the equity valuation and asset pricing literature for emerging markets.

Earnings per Share or Book Value: Superior Value Driver in Equity Valuations

In this paper, we evaluate the efficacy of two value drivers namely, earnings per share and book value for developing stock price forecasts using two performance evaluation criteria: 1) root mean squared error and 2) Thail inequality coefficient. We employ data for 13 sectors of BSE 500 from 1991 to 2010. We conduct our analysis in two phases. In phase one, we find that price to earnings is the better stand alone price multiple than price to sales in the Indian context. In the next phase, we show that the combination of value drivers does not significantly improve price forecast vis-a-vis stand alone multiples. Our findings are extremely relevant for equity analysts and portfolio managers who are continuously involved in equity evaluation and developing global asset allocation strategies.

Investment in Indian Sectors: Price Multiple Perspective

The case presents a situation wherein an investment company based out of US wants to increase returns to its investors and how it chooses to invest in emerging markets. Then the case proceeds with a unanimous decision by the management to invest in Indian economy. It shows how the fund manager goes about selecting the valuation technique namely, Relative valuation for decision making. There is a comparison being shown of relative valuation versus discounted cash flow (DCF) technique and why relative valuation is chosen over DCF. Further, it shows how the fund manager analyzed various sectors based on price multiples. The sectoral analysis of 18 sectors of BSE 500 Index has been done for a total period of 1990–2010 and three sub-periods. The case also highlights the importance of normality test before making decisions on the basis of summary statistics of price distributions. Finally, the case provides a decision situation to students in which they have to decide which sectors to choose for the investment and they are also required to provide a rationale of their choice.

Economic and Business Environment

Ruchir Sharma, Break Out Nations: In Pursuit of the Next Economic Miracles. New Delhi: Allen Lane, 2012, 291 pp., ₹ 530 (Hardback). ISBN: 978-1-846-14556-8

An Empirical Investigation of the Relationship between Net Stock Issues and Returns in India

In this article, we focus on net stock issues which is a relatively unexplored asset pricing anomaly. We examine the relationship between net stock issues and returns in the Indian context using data for BSE 500 stocks from 1995 to 2012. The relationship between size, value and momentum attributes and stock return is confirmed, which is consistent with prior literature. We specifically find a negative relationship between net stock issues and returns after controlling for other firm characteristics, thus implying that companies with larger public offerings provide lower post-event returns. The net stock issues attribute is empirically associated with size and value characteristics. Large firms and low price to book (P/B) or relatively distressed firms tend to make bigger public offerings. While the former may do it to finance business expansion plans, the latter rely more on external financing owing to weak earnings record. Our findings are pertinent for policymakers, market practitioners and academicians. The study contributes to equity market anomaly literature for emerging markets.

Strategic Allocation, Asset Pricing and Prior Return Patterns: Evidence from Indian Commodity Market

In this article we employ data for 12 commodities, four commodity indices and one stock market proxy from July 2006 to February 2011 for India. We find that commodities that provide higher average returns also exhibit higher price volatility. The return distributions for commodities as well as for indices do not seem to follow a random walk. Combining gold with stock market index provides large portfolio diversification benefits. Capital Asset Pricing Model (CAPM) seems to be a better descriptor of asset pricing in commodity markets when one uses commodity index instead of stock market index to represent market portfolio. It is further observed that there are no discernible prior return patterns in very short term and short term commodity returns that can be used by investors to develop portfolio trading strategies, as is the case in equity markets. Our findings are relevant for policymakers as well as for market traders. This study contributes to the alternative investment literature for emerging markets.

Relative Valuation A Sectoral View for Indian Capital Market

In this paper we studied the sectoral behavior of Indian capital market through relative valuation for a period over a period of 21 years. The period covered under the study is from 1990–2010. The study has been done both for a total period (1990–2010) and three sub-periods, viz. 1990–96, 1997–2003, 2004–10. The research finds that price multiple distributions tend to be non-normal prior to 2003. On post-2003 basis these sample distributions are approximately normal, thereby implying that mean and standard deviations are relevant descriptive statistic measures in the Indian context, for a more recent period. The study also finds that we cannot judge all the sectors by classifying them with single high or low price multiples. Different sectors tend to have different high and low multiples which stand true both for total period as well as for sub-periods.

Book Review: The Handbook of Equity Market Anomalies: Translating Market Inefficiencies into Effective Investment Strategies

Leonard Zacks (Ed.), The Handbook of Equity Market Anomalies: Translating Market Inefficiencies into Effective Investment Strategies, 2011, USA: John Wiley & Sons, Inc., pp. 334,

Cash Flow is King in Relative Valuation: A Myth or Reality

75 (Hardcover).

Equity Valuation Using Price Multiples: Evidence from India

In this article, the researcher evaluates the efficacy of two value drivers, namely, earnings per share (EPS) and cash flows for developing stock price forecasts using two performance evaluation criteria: (a) Root Mean Squared Error (Root MSE) and (b) Theil’s Inequality Coefficient. The examiner employs data for 13 sectors of BSE 500 from 1991 to 2010. The entire analysis is conducted in two phases. In phase one, the researcher finds that Price to Earnings (P/E) is the better stand-alone price multiple than Price to Cash Flow (P/CF) in the Indian context. In the next phase, the investigator shows that combination of value drivers does not significantly improve price forecast vis-à-vis stand-alone multiples. The findings of the study are in contrast with those for developed markets as shown by Penman (1996).