An empirical study into value investing on the Stockholm stock exchange
Investors are always searching the market for stocks that are undervalued and that can potentially create value. One way of finding undervalued stocks is to carefully analyze firms’ accounting ratios. Researchers have in the past found evidence that an investment in value stocks, often categorized as low P/E and low P/B ratio stocks, in most cases generates more value than an investment in growth stocks (categorized as high P/E and P/B). However, we found a lack of studies that investigates if this relationship exists on the Swedish market and if it holds true during the financial crisis. This resulted in the following research question:Would a portfolio consisting of value stocks outperform a portfolio consisting of growth stocks on NASDAQ OMX Stockholm?In order to answer the research question a quantitative method with a deductive approach has been applied and historical stock prices and accounting ratios over the time period 2005-2013 have been collected from Thomson Reuters Datastream. Returns were then calculated and portfolios of value and growth stocks were created based on the accounting ratios for every year. The returns where risk-adjusted with the help of the Sharpe-ratio before the Mann-Whitney U test was used in order to see if there is a significant difference between value and growth portfolios.For the price to earnings ratio the risk-adjusted returns of the value portfolio only outperformed the risk-adjusted returns of the growth portfolio two years out of the nine years tested. For the price to book measure the risk-adjusted returns of the growth portfolio outperformed the risk-adjusted value portfolio seven out of nine times.The results of the study seems to indicate that growth stocks outperform value stocks, contrary to much of the previous research that has concluded that value stocks outperform growth stocks. However, our findings were not statistically significant and we could not draw any clear conclusions from our results. The study did contribute with new knowledge however, by increasing the data available for value investing in Sweden and highlighting a need for more studies into smaller stock markets and for a period of financial distress, such as the financial crisis.
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