Adopting price-earnings and enterprise multiples to beat the Johannesburg Stock Exchange All Share Index.

Abstract

The theory behind the efficient market hypothesis exerts that it is not possible to consistently outperform the overall stock market by using stock picking and market timing strategies. The argument holds that, in an efficient market, all stock prices are appropriately priced and there is no over- or undervalued stocks to be found. Nevertheless, deviations from true stock prices can occur according to the hypothesis, although these deviations are mostly random occurrences. Thus, the only way an investor can outperform the overall stock market is by luck alone. However, the efficient market hypothesis is a controversial topic where it is often discussed within modern financial circles where academic theory has strong arguments both for and against the theory. Purpose: The purpose of this study is to investigate whether it is feasible to outperform the overall stock market through investing in stocks that appear undervalued according to enterprise multiple (EV/EBITDA) and the price-earnings ratio.