A New Value Strategy

Abstract

Traditional value measures performed poorly in the past three decades. We reevaluate the value strategy using a new 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, is distinct from known return predictors, and exists even in the most recent decade when book-to-market negatively predicts returns. The COP/P measure subsumes many widely used value measures and the conservative-minus-aggressive investment factor of Fama and French (2015).

Keywords: cash-based operating profitability; cross section; stock returns; value investing

JEL Classification: G02, G12