Profitability is Inflecting
In the past couple of months, we've highlighted how Profitability (a component of Quality), has been Oversold relative to its long-term trend.
As a reminder, Profitability is a combination of return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets.
Over time, the risk premia for Profitability has been strongly positive (see below), but the factor has seen weakness relative to long term trend over the past ~6 weeks in both our US and Global models. It now appears to be moving back towards the mean.
Long Term Trend
![Screen+Shot+2018-09-28+at+12.58.49+PM](https://cdn.prod.website-files.com/633fe0e8040abd10fc9a3420/63920044abe048494e11ae33_Screen%2BShot%2B2018-09-28%2Bat%2B12.58.49%2BPM.png)
Global Model
After bottoming out at -1.83 SD below the mean on September 4th, Profitability has gradually started to revert to the mean. Today, it now sits at -1.28 SD below the mean, and it appears that the past few days have seen a bit of a quicker uptick.
![Profitability+WW3+20180928](https://cdn.prod.website-files.com/633fe0e8040abd10fc9a3420/639200445a95da0f569fa278_Profitability%2BWW3%2B20180928.gif)
US Model
We've seen a similar trend for Profitability in the US. Since hitting an August 7th peak of +1.03 standard deviations above the mean (Overbought territory), the factor experienced a divergence from the long term trend on a normalized basis, falling to a September 25 trough of -1.84 SD below the mean. As you can see below, the factor has ticked up over the past two days, now sitting at -1.59 SD below the mean.
![Profitability+US3+20180928](https://cdn.prod.website-files.com/633fe0e8040abd10fc9a3420/6392004430555b5aac186302_Profitability%2BUS3%2B20180928.gif)
In the US, the sectors that are most correlated to Profitability are Utilities, Consumer Staples, and REITs.
Regards,
Omer