James - thanks for your thoughtful question. Bessembinder does not examine the characteristics of the left tail of the distribution. I share your observation that low-PE multiples are often associated with businesses in trouble and offer no protection to capital destruction. Retailers and media companies over the last five years come to mind. My own work using Factset data over the last ten years shows that stocks in the top quintile by PE multiple are 49% more likely to be in the bottom 20% of share price outcomes, while stocks in the least expensive quintile are 37% less likely to be in the worst 20% of outcomes. Taking it further, one variable only deals with one dimension, and to your point profitability matters, as does capital structure and management capital allocation. Stocks with the lowest quintile of ROIC are 44% more likely to be in the bottom 20% of outcomes; stocks in the most profitable quintile are 45% less likely. Lastly, this only tells you what's in the rear view mirror - a judgement about the durability of that ROIC is critical, which is why I don't believe in factor investing/ smart beta. That's a topic for another time! Stephen

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