COMBINING PBV AND PER RATIOS IN STOCK INVESTMENT

COMBINING PBV AND PER RATIOS IN STOCK INVESTMENT

The capital market is one of the investment venue that can be chosen investors. In Indonesia, these investments are generally carried out by buying shares of public companies listed on the Indonesia Stock Exchange. The government has been increasingly trying to advance the stock investment climate through the Gerakan Yuk Nabung Saham (the Saving in Stocks Movement) launched by the Indonesia Stock Exchange, which has even opened a special page on its website for novice investors (www.yuknabungsaham.idx.co.id). The rules for opening a minimum stock account balance have also been relaxed, from the original Rp25 million gradually down to now only Rp1 million. Furthermore, if an account is opened in one of the Indonesia Stock Exchange investment galleries, the initial deposit required is only Rp100,000.

The opening of the investment galleries across the country is one of the efforts of the Indonesia Stock Exchange to increasingly introduce stock investments, especially in the academic community. The gallery has a 3-in-1 concept which is a collaboration between the Indonesia Stock Exchange, universities, and security companies and is expected to not only introduce the capital market in terms of theory but also practice. The investment gallery at the Faculty of Economics and Business of Udayana University is the 250th investment gallery, which was inaugurated on March 10, 2017. The opening of the investment gallery received a positive response as seen from the many lecturers and students who started investing in shares.

Stock selection can be based on two types of analysis, namely technical analysis and fundamental analysis. Different from stock broker recommendations that usually provide recommendations based on technical indicators such as trend, support , and resistance, this essay suggests stock selection based on two fundamental indicators, namely the price-to-book value ratio (commonly abbreviated as PBV) and the price-to-earnings ratio (commonly abbreviated as PER).

PBV is the ratio between stock price and book value (equity). In general, people are of the opinion that cheap shares that are worth buying are stocks that have a low PBV ratio. PER is the ratio between stock price and earnings (earnings). As with the PBV ratio, in general people think that shares that are cheap so that it is worth buying are stocks that have a low PER ratio. However, there is also a possibility that stocks have relatively high PBV or PER because they are considered to have high growth prospects. Therefore, in order to reduce the level of investment risk, this paper suggests combining the two ratios in selecting shares to buy.

Evaluations of PBV and PER are always relative in nature. In order to determine whether a certain value of PBV or PER is high or low, a comparison must be made with the corresponding values of comparable companies. For example, as of June 26, 2020, the PBV [PER] of Bank BRI was 2.11 [11.45], while the PBV [PER] of Bank Mandiri was 1.32 [7.24]. Because the two companies are both engaged in the banking industry, and even both are state-owned banks, it can be said that the PBV (and PER) of Bank Mandiri was lower than that of Bank BRI. Furthermore, it can be concluded that as of June 26, 2020 the share of Bank Mandiri is cheaper than the share of Bank BRI.

Combining PBV and PER means choosing stocks with low PBV and at the same time low PER. The selection process can be carried out by dividing the shares into four quadrants, namely stocks with Low PBV and Low PER (Group 1); stocks with Low PBV and High PER (Group 2); stocks with High PBV and Low PER (Group 3); and stocks with High PBV and High PER (Group 4). The combination can be applied to all listed companies, but it is recommended to apply it to certain indices such as the Kompas 100 Index or the LQ45 Index.

Empirical verification of the results of the stock selection strategy described earlier has been carried out on the Kompas 100 Index using March 31, 2012 as the initial investment date. The results showed that the average one-year stock returns in Group 1 were 24.19% while the average returns for Groups 2, 3, and 4 were 13.19%, 7.32%, and 2.41%, respectively. If the investment is continued for three years, the average return for Group 1 is 9.96% while the other three groups produce an average return of 5.69%. If the investment is continued for five years, the average return for Group 1 is 16.12% while the other three groups produce an average return of 7.92%.

Although groups of stocks with low PBV and PER ratios are consistently producing higher returns than other groups for investment for one, three, and five years, the best results are obtained in the investment period of one year. This result is understandable considering the fact that PBV and PER values ​​always changes from time to time. In accordance with the results of the study, stock investors are advised to choose stocks that have a low value of both PER and PBV, and reevaluate the portfolio on an annual basis.