PSR – an efficient stock-selection tool?

In this paper we examine the simple investment factor in the Tokyo Stock Exchange (TSE). In the past, many papers have pointed out the existence of a book to market ratio of equity (PBR) anomaly in Japan. If we create portfolios with low-PBR equities, we could beat the TOPIX. Despite the asset price deflation, which started in 1991, especially in land and stock prices, the PBR was not the most efficient investment indicator in the TSE. We compare PBR, PER (earnings to market ratio) and PSR (sales to market ratio) from 1982 onwards. Over a 14-year period, the low-PSR equities beat the low-PBR and low-PER portfolio six times. Statistically, we calculate the IC (Information Coefficient) score between investment variables and return. Results show that the low-PSR IC score exceeds the other investment indicators, including market capitalization size. Among the 100 companies with low PSRs are industries not found on the list of low PERs and low PBRs. Thus, investors who base stock selection on PSR have a wider range of industries to choose from, which reduces the portfolio risk. We also examine the variety of selection for each factor. From the economic viewpoint, PSR is composed of asset turnover and leverage. Asset turnover is sensitive to business cycles, while leverage is significantly influenced by a company's management strategy. In economic recovery phases since the fiscal year 1970, year-to-year sales of the conpanies listed on the TSE first section (excluding financial and insurance sectors) went up when the business DI coincident index also increased, year-to-year.