Here are returns and other details for portfolios formed each year, 1976-2020 on the market’s pricing of growth, SG (for speculative growth) as a percentage of stock price. It covers almost all U.S. traded firms. Each year, firms are ranked on their SG (as a percent of their stock price) and formed into 10 portfolios. The numbers are means over all years.
| SG Portfolio | SG | E/P | Forward Annual Returns | Std. Dev. of Returns | Beta | Sharpe Ratio | Proportion of Losses |
|---|---|---|---|---|---|---|---|
| 1 (Low) | -0.532 | 0.142 | 0.133 | 0.313 | 1.113 | 0.288 | 0.320 |
| 2 | -0.110 | 0.104 | 0.108 | 0.283 | 1.065 | 0.231 | 0.321 |
| 3 | 0.041 | 0.091 | 0.094 | 0.269 | 0.971 | 0.189 | 0.339 |
| 4 | 0.148 | 0.081 | 0.087 | 0.259 | 0.918 | 0.170 | 0.340 |
| 5 | 0.245 | 0.071 | 0.090 | 0.271 | 0.912 | 0.174 | 0.357 |
| 6 | 0.339 | 0.063 | 0.083 | 0.282 | 0.941 | 0.143 | 0.366 |
| 7 | 0.438 | 0.053 | 0.083 | 0.287 | 0.866 | 0.139 | 0.366 |
| 8 | 0.568 | 0.041 | 0.090 | 0.306 | 0.896 | 0.153 | 0.374 |
| 9 | 0.817 | 0.018 | 0.083 | 0.338 | 0.950 | 0.118 | 0.395 |
| 10 (High) | 2.238 | -0.111 | 0.078 | 0.385 | 1.038 | 0.091 | 0.414 |
| Low-High | 0.055 | ||||||
| t-statistic | 3.48 |
From Penman, S., R. Gutsche, L. Gorkun-Voevoda, and A. Rif. Buying Risky Growth and an Explanation of the Returns to Trading on P/E Ratios. Journal of Portfolio Management, April 2025. © 2025 PMR. All rights reserved.
Be careful in interpreting this growth pricing: The returns could be due to mispricing growth but not so fast: The returns could also be due to the risk of buying growth. It looks like low SG is an underpricing that yields higher returns and high SG is overpricing that yields lower returns, but this could be due to risk that requires a higher return. The standard risk metrics—the return standard deviations and betas—indicate that the returns are not due to risk, but a value investor remains skeptical of these metrics. More fundamental analysis is needed to challenge the market’s pricing of growth. See particularly chapters 7 and 8.
Note that SG is related to E/P and chapter 2 informs that E/P (and P/E) is determined by both growth and risk. So, the higher returns to buying high E/P (low P/E) might be returns to mispricing but might also be due to risk: Price in the E/P ratio is discounted for risk to yield a higher return as reward for that risk.