The Predictive Power of Price-Earnings and Price-Sales Ratios

    by Richard Goedde

    The price-earnings and price-to-sales ratios are popular methods of valuing stocks. But are they really useful to an individual investor?

    In his book, “What Works on Wall Street” (revised edition, McGraw-Hill 1998), James P. O’Shaughnessy did extensive analysis on how these ratios predict future stock price performance. He found a significant correlation between each ratio and price performance, with lower ratios leading to better performance during the following year.

    This article summarizes part of his work, and provides further information on the specific price-earnings and price-to-sales ratios that lead to superior results. The purpose of this article is to:

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