The Value Of Growth At A Reasonable Price: Evidence From The Taiwan Stock Exchange

Abstract

Value and growth represent two opposite investment styles when price multiples such as the price-to-earnings ratio and the price-to-market ratio are used to classify the investment styles of equities. Motivated by the argument of Peters (1991) and Broussard, Michayluk and Needy (2005) that price multiples are imperfect valuation measures for firms other than firms in mature industries, and also the argument of Ahmed and Nanda (2001) that value and growth investing strategies should not be mutually exclusive, this study attempts to identify stocks with above-average sales growth that trade at average or below-average price-to-sales multiples. Their performance relative to pure growth portfolios is subsequently analyzed. Using variants of historical growth rates relative to previous month, previous year, historical low and historical high as measures of growth potential, and the price-to-sales multiple as the measure of the reasonableness of the stock prices, we construct growth-at-a-reasonable-price (GARP) portfolios on the Taiwan Stock Exchange over the period from 01 January 2000 through 31 March 2010. Study results indicate that the GARP portfolios outperform their counterpart pure growth portfolios over the examination period. The incremental contributions of GARP measured in terms of the return improvements, risk reduction and improvements in the Sharpe ratios when switching from the pure growth stock selection technique to the GARP selection technique, is found to be significant over the examination period.