Factor Spotlight
Factor University

Profitability is at an inflection point

I wanted to highlight Quality as a factor that is hitting an inflection in both the US and Global markets. In our platform, Quality = Profitability, and is defined as a combination of return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets.

Global Market

  • Excess return for Profitability has increased by 1.63% in the past 12 months, and +44 bps YTD on a cumulative basis.
  • Taking a deeper look, we can see that normalized returns actually hit a trough of -1.98 standard deviations below the historical mean on Feb 15 2018, and has since rallied to a peak of +1.45 SD on April 16th.
  • In the past 10 days, the factor has appeared to be reverting back towards the mean, currently at 1.17 SD above the mean and continuing on a relatively mild decline.

US Market

  • When isolating the factor within a smaller pool of ~9,000 US-only stocks versus 40,000 global stocks, Profitability has even more pronounced characteristics.
  • Excess return is up 2.59% in the past year, 1.42% of which has happened YTD.
  • On a normalized basis, the factor is now 2.34 standard deviations above the historical mean, which our Factor Profile tool flags as "Extremely Overbought." The factor had recently bottomed out at -1.74 SD on March 14, 2018.
  • While the factor hasn't started to level out as we're seeing in the global market, the curve does appear to be flattening over the past couple of weeks.

It's important to note that when we see this type of signal alignment between the global & US markets, it tends to suggest a stronger inflection point. We'll continue to track this factor and keep you posted as these trends develop.

Please let me know if you'd like to see the impact of Profitability (and other) factors on your portfolio's performance and risk profile.


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