A study of contrarian investment strategies based on book to market ratio, price earning ratio and sales growth

A contrarian stock selection strategy consists of buying stocks that have been losers and selling short stocks that have been winners. The strategy is formulated on the premise that the stock market overreacts to news, so winners tend to be overvalued and losers undervalued. Many investment strategies, such as those based on the price/earnings ratio, or the book/market ratio, can be regarded as variants of this strategy. The purpose of this paper has been to investigate the existence of a value premium on the Indian stock market. The data set has been used to test three different value strategies based on EP BM, and SG for twelve-year holding periods. The empirical results indicated the inferior performance for two value variables namely earnings-to-price (EP) ratio, and the Sales Growth (SG). It discovered that the value portfolios (high BM) generated higher returns than glamour portfolios (low BM). On the whole the study revealed the absence of the contrarian investment strategies in the Indian stock market.