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.

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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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