A New Value Strategy
50 Pages Posted: 8 Jan 2020 Last revised: 13 Jan 2020
Date Written: December 19, 2019
Motivated by recent studies on the relation between profitability and stock returns, we construct a new value measure—the ratio of cash-based operating profitability to price (COP/P)—and find a zero-investment portfolio that buys the highest-COP/P stocks and shorts the lowest-COP/P stocks earns annualized returns of 11% on a value-weighted basis and 13% on an equal-weighted basis. The COP/P effect holds even for large-capitalization stocks, exists in different periods, is distinct from known return predictors, and cannot be explained by existing factor models. The COP/P measure subsumes existing value measures and the conservative-minus-aggressive investment factor of Fama and French (2015).
Keywords: cash-based operating profitability; cross section; stock returns
JEL Classification: G02, G12
Suggested Citation: Suggested Citation