Gross profitability and momentum

Abstract

Purpose The purpose of this paper is to examine the combined performance of momentum and a gross profitability-based strategy. The motivation stems from the strong performance of momentum on the short side and profitability on the long side, suggesting a potentially superior combined strategy. Gross profitability is also a measure of firm quality, so that another motivation is to contribute to a growing literature on factor-based investing that includes momentum and quality as potential factors. Design/methodology/approach The empirical approach employed in the paper is standard in the asset pricing literature. The firms are sorted into portfolios based on profitability and momentum, and the combined performance is studied through independent double sorting. Both value-weighted and equally weighted returns are reported in case of key empirical results. Findings The combined strategy results in superior performance. Specifically, the strategy produces results 2.75 greater than the momentum strategy, and about four times as high as the profitability strategy. The strategy also has much higher Sharpe ratio that improves further when combined with size and value strategies. Research limitations/implications The research has significant implications for academics and practitioners alike. A new investment strategy that has not been explored in the literature is presented. The superior performance of the strategy presents a challenge for the market efficiency, and would be of interest to academics and practitioners working in the area of investment management. Practical implications There has been a growing interest in multi-factor investing in recent years. The paper documents that superior performance is achieved by combining two of the popular factors, namely profitability and momentum. Originality/value The research is the first to study the combined performance of profitability and momentum, and provide evidence on the superiority of the combined strategy.

Gross Profitability and 52-Week High Price

“…The standard portfolio approach is adopted for analyzing the characteristics-based investment strategies by keeping the study of Bhootra (2018). Stocks are ranked, and split into five portfolios according to 52-week high.…”

“…Tek bir stratejiden ziyade arasında zayıf ilişki bulunan karakteristiklerin birlikte kontrol edilmesi ile oluşturulabilecek bir yatırım stratejisinin daha karlı olması muhtemel görünmektedir. Bu amaçla, Bhootra (2018) hisse senedi piyasalarında yaygın olarak araştırılan momentum ve karlılık etkilerinin birlikte kontrolüne dayalı bir yatırım stratejisi önermiştir.…”

“…Recently explored, simultaneously controlled 52-week high and gross profitability strategy is superior to individual strategies. Bhootra (2018) has justified the motivation of the research by referring conditional momentum strategies those have been conducted with size, analyst coverage, book-tomarket ratio, credit rating, earnings surprise, market state, dividend payout in literature (Daniel and Titman, 1999;Hong et al 2000;Cooper et al 2004;Chordia and Shivakumar, 2006;Avramov et al, 2007;Asem, 2009;Asness et al, 2013). The rationale of the strategy is simple.…”

“…(2013)'s point of view, the profitability is orthogonal to momentum so that joint strategy carries diversification potential. Bhootra (2018) investigates the profitability of the conjoint strategy in the US.…”

Covid-19: Efek Pada Saham Yang Terdaftar Di Jakarta Islamic Index (Jii)

“…Strategi ini juga sering dihubungkan dengan dengan beberapa faktor seperti size, profitabilitas, volume transaksi, tiga faktor model fama-French, dan faktor harga underreaction dan overreaction. (Bhootra, 2018) e-ISSN 2580-3743…”