We found that roughly 50% of the most expensive stocks (those in the top quartile) remained in the top quartile one year later. Roughly 30% dropped into the next quartile, while roughly 10% fell to the second-cheapest quartile and the cheapest quartile respectively. Since these companies have the highest valuations for the current fundamentals, we can think of this most expensive quartile as a proxy for the most “growth-y” companies. The picture overall looks slightly different for the lowest quartile of value, which represents the cheapest stocks. On average, 75% of the cheapest quartile of companies in the US remain in the cheapest quartile one year later, while 17% graduate to the second quartile, and 5% and 3% move to the third and fourth quartile respectively. Within the cheapest quartile, we find evidence that valuation multiples tend to mean revert, albeit gradually.
Related: Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks and A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 Years and The Economics of Inequality in High-Wage Economies