Gross Profitability
CONFIRMEDGross profits / assets predicts returns about as well as book-to-market. Profitable firms earn more despite higher valuations, so the strategy is a growth tilt that hedges value.
| THE STRATEGY | $SPX BUY & HOLD | |
|---|---|---|
| Growth a year (CAGR) | 12.9% | 8.9% |
| Return per unit of risk (Sharpe) | 0.84 | 0.65 |
| Worst fall (max drawdown) | -43.3% | -52.6% |
// GROWTH OF $1, LOG SCALE
Tested on years it never saw (from the split): 16.8% a year against 12.4% for the benchmark; Sharpe 0.76 in the training years, 0.97 after.
After 25 bps of trading costs: 12.2% a year. EDGE OVER RANDOM
// DECADE BY DECADE
| ERA | STRATEGY | BENCHMARK |
|---|---|---|
| 1990s | 13.7% | 19.1% |
| 2000s | 5.5% | -2.6% |
| 2010s | 15.8% | 11.6% |
| 2020s | 19.6% | 14.1% |
// THE IDEA, AS PUBLISHED
Novy-Marx (2013), JFE · 2013
- Gross profitability = (revenue - COGS) / total assets, annual data
- Exclude financials; sort each June into quintiles on NYSE breakpoints
- Long top quintile, short bottom, value weighted; pairs well with value
A real computation on the QuantGPT warehouse, survivorship-free, walk-forward. Gross returns, no costs except where stated. Past performance is not a promise. Findings, not advice. COMPUTED 2026-09-24 20:49 ON THE QUANTGPT WAREHOUSE. COMPANIES THAT LATER DELISTED ARE NOT IN THIS UNIVERSE YET (A FIX IS IN PROGRESS), SO THE RESULT LEANS TOWARD SURVIVORS. FUNDAMENTALS BY FILING DATE. NOT INVESTMENT ADVICE.