This article evaluates the usefulness of the price-earnings ratio as an analytical tool. Based upon a sample of 390 stocks over the period from 1953 through 1964, the study shows that better investment performance can be obtained from a portfolio comprised of low price-earnings ratio stocks as contrasted to portfolios made up of high price-earnings ratio stocks. For individual securities, the author also concludes that good performance may be found among stocks selling at almost any price-earnings ratio. However, the very poor performers are most frequently found among those stocks selling at large premiums relative to earnings.
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