{"id":52,"date":"2015-11-10T21:04:18","date_gmt":"2015-11-10T21:04:18","guid":{"rendered":"http:\/\/www.sugata.in\/?p=52"},"modified":"2015-11-10T21:04:18","modified_gmt":"2015-11-10T21:04:18","slug":"gross-profitability-anomaly","status":"publish","type":"post","link":"http:\/\/www.sugata.in\/index.php\/2015\/11\/10\/gross-profitability-anomaly\/","title":{"rendered":"Gross Profitability Anomaly"},"content":{"rendered":"

A recent anomaly (aka a piece of data that predicts future stock returns well without any apparent addition to risk) that has been discussed heavily over the last 5 years or so is the Gross Profitability Anomaly. This anomaly was formally documented by Robert Novy-Marx in 2009 and a version of the paper can be found here:\u00a0http:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=1598056\u00a0<\/a><\/p>\n

 <\/p>\n

Gross profitability is simply (revenues – COGS) \/ Total Assets. In the implementation below, I divide trailing 12 month (revenues – COGS) by assets as of the last quarterly or annual report. To make sure results are not driven by illiquid\/small cap stocks\/some other weird stuff, I apply my standard restrictions screen to reduce the universe of investible stocks to those that are actually trade-able in size.<\/p>\n

\"restrictions\"<\/a><\/p>\n

Within the set of stocks that pass these restrictions, I sort stocks into quintiles (5 buckets) based on gross profitability and follow these quintiles, rebalancing quarterly. The backtests are below:<\/p>\n

\"profitability<\/a><\/p>\n

 <\/p>\n

We can see the top 2 quintiles (top 40%) of stocks, ranked by the gross profitability metric quintuple our investment vale over the last 15 years; the market roughly doubles over the last 15 years and the lowest quintile (or bottom 20%) of gross profitability stocks *lose* money.<\/p>\n

This is all the more remarkable when you consider that one of my restrictions above was a 0 to 30 PE … so we aren’t event including stocks that lose money in the bottom quintiles!<\/p>\n

Sorting by profitability appears to enhance standard value screens and if you use value strategies, consider adding a profitability element to them to maximize your returns.<\/p>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

A recent anomaly (aka a piece of data that predicts future stock returns well without any apparent addition to risk) that has been discussed heavily over the last 5 years or so is the Gross Profitability Anomaly. This anomaly was formally documented by Robert Novy-Marx in 2009 and a version of the paper can be […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3,2],"tags":[],"_links":{"self":[{"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/posts\/52"}],"collection":[{"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/comments?post=52"}],"version-history":[{"count":2,"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/posts\/52\/revisions"}],"predecessor-version":[{"id":56,"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/posts\/52\/revisions\/56"}],"wp:attachment":[{"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/media?parent=52"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/categories?post=52"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.sugata.in\/index.php\/wp-json\/wp\/v2\/tags?post=52"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}