The Most Expensive Stocks Have Surprisingly OutperformedOctober 20, 2014
One of the ways we like to dissect equity performance is by taking a valuation factor, such as the price-to-book ratio, and analyzing how the performance of the lowest (i.e. cheapest) price-to-book stocks have performed relative to the performance of the highest (i.e. most expensive) price-to-book stocks. In the table below, we place all 1600 MSCI World Index stocks into 10 different deciles based on its price-to-book value. The first decile is lowest 10% price-to-book stocks and the 10th decile is the highest 10% price-to-book stocks.
Judging by the R-squared value in the bottom row of the table, stock performance has been highly correlated to price-to-book ratio over all time frames over the past year. Over the past month, the cheapest stocks have fallen by 11% on average compared to the most expensive stocks which have only dropped by 5%. The returns over the last year are even wider. The cheapest stocks have dropped by over 14% while the most expensive stocks have increased by 10%.
We also see that stocks have performed inverse to its dividend yield level. The stocks with the highest dividend yield have fallen by nearly 9% over the past year. The stocks with the lowest dividend yield have increased by 3.7% over the past year. Looking ahead, it would be surprising if the most expensive and lowest yielding stocks continue to impressively outperform especially as valuation levels remain near record highs.