Decomposing the P/E Ratio

The price-earnings effect has been a challenge to the idea of efficient markets for many years. The P/E used has always been the ratio of the current price to the previous year’s earnings. However, the P/E is partly determined by outside influences, such as the year in which it was measured, the size of the company, and the sector in which the company operates. Looking at all UK companies since 1975, we determine the power of these influences, and find that the sector influences the P/E in the opposite direction to the others. We use a regression to weight the influences according to their power in predicting returns, reversing the sector influence so that it works for us and not against us. The resulting weighted P/E widens the gap in annual returns between the value and glamour deciles by 8%, and identifies a value decile with average returns of 32%.

The Extremes of the P/E Effect

The price-earnings effect has been a challenge to the idea of efficient markets for many years. The P/E used has always been the ratio of the current price to the previous year’s earnings. However, the P/E is partly determined by outside influences, such as the year in which it was measured, the size of the company, and the sector in which the company operates. Looking at all UK companies since 1975, we determine the power of these influences, and find that the sector influences the P/E in the opposite direction to the others. We use a regression to weight the influences according to their power in predicting returns, reversing the sector influence so that it works for us and not against us. The resulting weighted P/E widens the gap in annual returns between the value and glamour deciles by 8%, and identifies a value decile with average returns of 32%.

The Long-Term P/E Radio

The price-earnings effect has been thoroughly documented and widely studied around the world. However, it has always been calculated on the basis of the previous year’s earnings. We show that the power of the effect has until now been seriously underestimated, due to taking too short-term a view of earnings. We look at all UK companies since 1975, and using the traditional P/E ratio we find the difference in average annual returns between the value and glamour deciles to be 6%, similar to other authors’ findings. We almost double that gap by calculating P/E ratios using earnings averaged over the last eight years. Averaging, however, implies equal weights for each past year. We widen the gap further by optimising the weights of the past years of earnings in the P/E ratio.

XASH genes promote neurogenesis in Xenopus embryos

Neural development in Drosophila is promoted by a family of basic helix-loop-helix (bHLH) transcription factors encoded within the Achaete Scute-Complex (AS-C). XASH- 3, a Xenopus homolog of the Drosophila AS-C genes, is expressed during neural induction within a portion of the dorsal ectoderm that gives rise to the neural plate and tube. Here, we show that XASH-3, when expressed with the promiscuous binding partner XE12, specifically activates the expression of neural genes in naive ectoderm, suggesting that XASH-3 promotes neural development. Moreover, XASH-3/XE12 RNA injections into embryos lead to hypertrophy of the neural tube. Interestingly, XASH-3 misexpression does not lead to the formation of ectopic neural tissue in ventral regions, suggesting that the domain of XASH proneural function is restricted in the embryo. In contrast to the neural inducer noggin, which permanently activates the NCAM gene, the activation of neural genes by XASH-3/XE12 is not stable in naive ectoderm, yet XASH-3/XE12 powerfully and stably activates NCAM, Neurofilament and type III β-tubulin gene expression in noggintreated ectoderm. These results show that the XASH-3 promotes neural development, and suggest that its activity depends on additional factors which are induced in ectoderm by factors such as noggin