Cheap Stocks; Defining Cheap Valuations [ANALYSIS]

Do Cheap Stocks Allow Higher Earnings? by Filip Rudnicki

[klarman]

People say that stocks with low valuation (low P/E, low P/BV, low P/S) are better investments than expensive ones. Is it true? And what does it mean that a stock is cheap? Is P/S = 1 cheap? Or maybe P/S = 2 is cheap? Where is the border of cheapness? Today we’re going to find answers to these questions. To do this I performed a test. I divided all stocks from the market into 10 portfolios. Let’s call them:

1. Extremely cheap stocks
2. Very cheap stocks
3. Cheap stocks
4. Quite cheap stocks
5. Slightly cheap stocks
6. Slightly expensive stocks
7. Quite expensive stocks
8. Cheap stocks
9. Very expensive stocks
10. Extremely expensive stocks

I started from the first date in my database which is July 28, 2006. For each stock present...