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Some money managers are getting excited by the latest holy grail for investors - using gross...
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Sunday, March 3, 9:30 AM ETSome money managers are getting excited by the latest holy grail for investors - using gross profitability as a basis for picking stocks. Research from University of Rochester's Robert Novy-Marx shows that cheap "quality" plays outperformed the overall market by over four percentage points a year from 1963-2011. "You get much more informative signals about the health of firms" this way, says Novy-Marx.
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55/176 = .3125 ....Exxon has 78 billion in gross profit 334 billion in assets
78/334 =.2335....Do I buy Apple instead of Exxon??
This is why you will never have a computer solve some equation to pick the best stocks. You need someone to read the quarterly reports figure out where the company is headed and balance that against the raw data. A data driven screener can help, but ultimately it is the investor who must determine if the company is really a buy.
BTW, this is why most of the money for data driven buying and selling goes to HFT. In the short term the market lacks much rationality, which is why a computer can beat a human. In the long term not so much...
the whole thing could have been an exercise in data mining - the .33 also feels like a magic number - why that and not .4 for example
P
"Picking stocks this way isn't something you could pull off on a weekend morning in your pajamas. For each potential investment, you would need to subtract the company's cost of goods sold from its revenue, then divide by its total assets."
Actually, I think subtracting and then dividing is something I could pull off on a weekend morning in my pajamas : P
Focus on gross profit is a starting point: from there it's important to look at what is being done with the resulting cash flows. Capex sometimes pressures stock prices because investors prefer free cash flow. But take for example Verizon (VZ), they did a lot of capex on FiOS and 4G wireless, eventually it drove the stock higher. R&D is similar, but very hard to quantify, it should result in higher gross margins if innovative products are being developed on a regular basis.
Some companies seem to report lower profits as a percentage of cash flow, or of gross profits. Aggressive deprecitaion and amortization can reduce reported earnings, but the cash can be put to good use.
Another thing with backtesting, the models usually include rebalancing at regular intervals. The equal weight S&P 500 outperforms the regular version, partly because of the rebalancing.
in gross profit...32.55 billion in assets....yikes....
Profitablity to Assets...
I fail to see what the excitement is about. Earnings quality is basically just adjusting for depreciation and R&D spending. Any standard DCF model should take these factors into account.
So yes, all thinks equal a low P/E stock in a highly capital intensive industry is worth less. And a company that spends much on R&D is worth more than the TTM P/E might indicate.
This is stating the obvious...
Yeah, there is something new
Manage your own money!
There is no such place as Rochester University. There is a Rochester College in Michigan.
I know this is nit-picky, but....
So- Where in the world is Carmen Sandiego?
Bill Bernstein
Cliff Assness
are mentioned - these are credible people
interesting that this is also a Buffet metric this gross profit efficiency idea
An interesting screen
P
Also, can someone suggest the best free website that allows for this screen?
Or simply put, find the company with the largest ROA/(P/E).