Is there a Gross Profitability Premium on the Johannesburg Stock Exchange?
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, gross-profit-to-assets and the double-sort are still superior to book-to-price and earnings-to-price, but when compared to the market index, the portfolios all underperform. Regressions of the excess returns of both the long and long-short portfolios against the five factors of Fama and French's Five Factor Model (2015) show that the intercepts (alphas) of the various portfolio excess returns are not statistically significant and, in the case of the long portfolios, are weakly negative. Within the assumptions of this model, these findings, therefore, fail to confirm that the various factorbased investment strategies statistically outperform the market on a risk-adjusted basis.
Networked Digital Library of Theses and Dissertations