Abstract:
Classification of stocks either value or growth has been considered as one of the
investments styles, a modern investor would be gratified of. Value stocks are those
stocks that trade at low prices compared to the fundaments of the company with low
price multiples whereby growth stocks are those stocks with high price multiples and
trade at high prices. The performance of value and growth stocks are studied by
means of value and growth portfolios, which are constructed on the basis of price-toearnings,
price-to-book and price-to-cash flow. Hence this study examines the
performance of value and growth stocks during the post war era including the period
of 2009 to 2014 in Sri Lankan Capital Market. The main objective of this study is to
test the applicability of the theory to the Sri Lankan context. To classify stocks to be
included in value or growth portfolios, ranking each of the multiple in descending order
for each year has been used and the highest 30 companies were taken as growth
portfolios and lowest 30 companies were taken as value portfolios. The portfolio
average return, risk and beta were calculated for each portfolio as well as the return
per unit of risk for each portfolio was measured by Jensen’s Alpha and Treynor
methods. Besides return and risk, price-multiples are studied to identify whether one
price multiple provide higher return than others. The findings of the study does not
provide a statistically significant value premium for the value stocks in terms of
absolute value as well as risk adjusted return basis, which leads to a conclusion that,
in the Sri Lankan Capital Market Context, the outperformance of value stocks over
growth stocks in a short time horizon does not hold valid.
