**Key Investment Insights** **Low-P/E portfolios significantly outperform high-P/E portfolios** Backtesting was conducted by selecting the 20 stocks with the lowest P/E ratios and the 20 with the highest P/E ratios from all A-shares. The results revealed stark differences between the two groups. From May 7, 2014, to October 27, 2025, the low-P/E portfolio outperformed the CSI 300, delivering an annualized return of 8.70% and an excess return of 42.38%. In contrast, the high-P/E portfolio underperformed the CSI 300, with an excess return of -42.06%. During market cycles favoring growth stocks (2020–2021), the low-P/E portfolio slightly lagged the CSI 300, reflecting periodic inefficiencies in the low-P/E factor. However, post-2022, as market sentiment shifted back to value stocks, the low-P/E portfolio reached new highs.

**Enhancing P/E portfolios with institutional coverage** Adding a filter for stocks with "over 10 institutional ratings" improved backtest results. From May 7, 2014, to October 27, 2025, the low-P/E portfolio achieved higher returns with minimal volatility increase and reduced maximum drawdown, yielding an annualized return of 12.83% and an excess return of 181.54% against the CSI 300. The high-P/E portfolio also showed marked improvement, with an annualized return of 11.34% and a positive excess return of 124.64%. Institutional coverage effectively filtered out overvalued, speculative stocks while retaining high-growth potential names.

**Expanding low-P/E portfolios to mitigate sector bias** Increasing the low-P/E portfolio size from 20 to 50 stocks enhanced performance. The diversified 50-stock portfolio reduced exposure to sector-specific risks and value traps, delivering an annualized return of 12.28% and an excess return of 159.46% over the same period.

**Low P/E percentile as the top-performing single factor** Historical P/E percentile, which measures a stock’s current valuation relative to its past range, was tested as a standalone factor. A portfolio of the 20 stocks with the lowest 6-month P/E percentiles outperformed all previous strategies, generating an annualized return of 17.34% and an excess return of 409.30% against the CSI 300. However, adding institutional coverage slightly reduced returns, likely due to excluding high-potential, less-researched stocks.

**Risk Warnings** - Historical performance does not guarantee future results. - Backtesting excludes actual transaction costs. - Potential data inaccuracies may exist.

**1. Preliminary P/E Factor Backtesting** The P/E ratio, calculated as stock price divided by earnings per share (EPS), is a classic valuation metric. This study uses trailing twelve-month (TTM) P/E for timeliness. Low P/E may indicate undervaluation, while high P/E often reflects growth expectations but carries downside risks.

**Single-Factor P/E Backtest (2014–2025)** Portfolios of the 20 lowest- and highest-P/E stocks were rebalanced semi-annually (May 7 and November 7), excluding loss-making and ST/*ST stocks. Key results: - **Low-P/E (20 stocks):** Annualized return 8.70%, excess return 42.38%, max drawdown -43.62%. - **High-P/E (20 stocks):** Annualized return 5.05%, excess return -42.06%, max drawdown -73.61%.

**2. P/E + Institutional Coverage Backtest** Adding "10+ institutional ratings" improved both portfolios: - **Low-P/E + coverage:** Annualized return 12.83%, excess return 181.54%. - **High-P/E + coverage:** Annualized return 11.34%, excess return 124.64%.

**3. Sector-Neutral P/E Optimization** **Expanded portfolios (50 stocks):** - Low-P/E: Annualized return 12.28%, excess return 159.46%. - High-P/E: Annualized return 6.66%, excess return -8.99%.

**P/E Percentile Factor:** The 20 lowest-P/E-percentile stocks delivered the best results (annualized return 17.34%, excess return 409.30%), though adding coverage slightly reduced returns.

**Conclusion** The low-P/E percentile factor, particularly when sector-neutral, offers superior risk-adjusted returns. Institutional coverage enhances stability but may cap upside potential. Diversification mitigates sector risks, making larger portfolios more resilient.