Is there a Gross Profitability Premium on the Johannesburg Stock Exchange?
type: CreativeWork
description: This study tests whether a gross-profit-to-assets premium exists on the Johannesburg Stock Exchange (JSE) by constructing portfolios over a 16-year time period from 2002 to 2018. The use of gross-profit-toassets as a stock selection tool has been found to be a viable investment strategy in some developed markets. However, this concept has not been tested on the JSE, which is a sophisticated stock exchange within a developing economy. This approach may also be a viable strategy for South African investors and, thus, is worth investigating. In addition, there exists the possibility of improving value strategies by adding a gross-profit-to-assets quality strategy overlay to hedge against the “value trap” to which the former method is susceptible. This study, therefore, compares value investing to quality investing strategies in terms of their returns by constructing both long and long-short portfolios using four metrics namely: gross-profit-to-asset ratios, book-to-price ratios, earnings-to-price ratios, and a double sort of gross-profit-to-assets ratios and bookto-price ratios. In addition, excess and abnormal returns are calculated, and portfolios are once again compared to each other. When excess returns are calculated, each separately constructed portfolio is compared to the market index, and then to the risk-free rate. Lastly, the individual portfolios are compared to expected returns, calculated using the Capital Asset Pricing and the Fama and French Five Factor (2015) asset pricing models. The study finds that long only portfolios constructed using gross-profit-to-assets outperformed both bookto-price and earnings-to-price metrics. Further, it is found that adding gross-profit-to-assets to a value strategy, using the book-to-price ratio, is an improvement on a simple value strategy – probably because it avoids the “value trap” problem. While the long only portfolios show positive results, the long-short portfolios are not as successful. For long-short portfolios…
abstract: This study tests whether a gross-profit-to-assets premium exists on the Johannesburg Stock Exchange (JSE) by constructing portfolios over a 16-year time period from 2002 to 2018. The use of gross-profit-toassets as a stock selection tool has been found to be a viable investment strategy in some developed markets. However, this concept has not been tested on the JSE, which is a sophisticated stock exchange within a developing economy. This approach may also be a viable strategy for South African investors and, thus, is worth investigating. In addition, there exists the possibility of improving value strategies by adding a gross-profit-to-assets quality strategy overlay to hedge against the “value trap” to which the former method is susceptible. This study, therefore, compares value investing to quality investing strategies in terms of their returns by constructing both long and long-short portfolios using four metrics namely: gross-profit-to-asset ratios, book-to-price ratios, earnings-to-price ratios, and a double sort of gross-profit-to-assets ratios and bookto-price ratios. In addition, excess and abnormal returns are calculated, and portfolios are once again compared to each other. When excess returns are calculated, each separately constructed portfolio is compared to the market index, and then to the risk-free rate. Lastly, the individual portfolios are compared to expected returns, calculated using the Capital Asset Pricing and the Fama and French Five Factor (2015) asset pricing models. The study finds that long only portfolios constructed using gross-profit-to-assets outperformed both bookto-price and earnings-to-price metrics. Further, it is found that adding gross-profit-to-assets to a value strategy, using the book-to-price ratio, is an improvement on a simple value strategy – probably because it avoids the “value trap” problem. While the long only portfolios show positive results, the long-short portfolios are not as successful. For long-short portfolios…
author: Dean, Jacqueline
keywords: Financial Management
date published: 2020
date modified: 2026-07-22T22:22:52Z
provider: University of Cape Town
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: Department of Finance and Tax

PropertyValue
property ID: Handle
value: http://hdl.handle.net/11427/32643