Return on Assets Stock Strategy: Long High-Profitability, Short Low-Profitability

Summary

The document describes a U.S. stock market strategy that sorts companies by market capitalization and then ranks them by return on assets (ROA). ROA is calculated from quarterly income and assets from the prior quarter. The portfolio buys the three highest ROA deciles and shorts the three lowest in each size group, equally weighting stocks and rebalancing monthly. Its investment universe includes NYSE, AMEX, and Nasdaq stocks above a stated sales threshold.

The proposed explanation is that asset productivity helps reveal differences in investors’ required returns, so profitable firms may earn higher average returns than less profitable ones. The cited research presents an ROA factor as part of a model that explains several return patterns, including those related to earnings and valuation. The document gives no detailed performance statistics for the strategy itself. It also says the strategy’s relationship to broad equity market risk is not established; the long side may track the market, while the short side’s potential as a hedge requires further testing.

Key ideas

• The strategy ranks stocks by ROA within separate market capitalization groups.
• It buys the top three ROA deciles and shorts the bottom three in each group.
• ROA uses quarterly income divided by assets from the prior quarter.
• The portfolio is equally weighted and rebalanced monthly.
• The document leaves the strategy’s market-risk correlation and hedging potential unresolved.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.