Performance of Low Price-Earnings Companies

Practitioners on the stock exchange have claimed that low price earnings (P/E) ratio stocksare generally bargains and do better than the stocks with high P/E ratios. This effect isusually known as the P/E ratio anomaly.The purpose of this study has been to test empirically whether the investment performanceof listed companies on the Stock Exchange of Mauritius (SEM) is related to the P/E ratios.An analysis of such a study can help fund managers and academics to contribute to thediscussion of the existence of the P/E ratio anomaly in Mauritius and the market formefficiency in the SEM.Results from a portfolio study showed that, between January 2001 and December 2003,below median P/E ratio portfolios earned, on average, higher absolute and risk-adjustedrates of return rather than above median P/E ratio portfolios. These results showed thatinvesting on low P/E companies on the SEM was rewarding and could be used byinvestment professionals.