Gross profitability is celebrated as the quality metric that finally works. Here, on its own, its ranking was close to noise. So the real question is whether the quality half earned its place beside the value half, or whether you were simply being paid for owning cheap companies. And, if not here, where the metric does earn its keep.
A two factor screen hides a simple accounting question: is the whole better than either part? If profitability added real information on top of cheapness, the combination should beat plain value. If it did not, then the quality label was decoration, and you were buying cheap stocks with extra steps.
Measured against its closest index, a smaller company benchmark it tracked at about 0.94, the screen added only around 2% a year of excess return, modest by the standards of this series and a fraction of what plain deep value or the accruals screen produced. Paired with a ranking that barely sorted, the picture is consistent: gross profitability, used as a standalone ranker alongside cheapness, did not do much that owning a broad basket of reasonably priced companies did not already do. The famous quality edge was, on its own, faint.
There is one hint the signal was not entirely empty. Unlike a pure noise ranking, tightening into the highest scoring names did modestly raise the return rather than lower it. So the score carried a faint, real thread of information, just nowhere near enough to build a high conviction strategy on. Treated gently, as a mild tilt among quality names, it helped. Trusted as a precise ranking, it disappointed.
Here is the redemption, and the real lesson. In a separate test we used this exact profitability measure not to rank stocks, but to filter a momentum strategy, keeping only the strong performers that were also genuinely profitable. Used that way, it did clear work: it cut momentum's worst crash from about 67% to 50% and screened out the junk. The metric was never a good ruler for choosing between decent companies. It is a good gate for keeping out bad ones. Its value is as a quality overlay on another signal, not as a signal of its own.
Gross profitability is not a bad metric, and Novy-Marx was not wrong that quality and value belong together. The mistake is expecting it to carry a strategy by itself. On its own it beat the market only because it kept you among cheap, decent companies, and its fine ranking was close to noise. As an ingredient, a filter that keeps the junk out of another screen, it does real and useful work. Used as the main engine, it underwhelms. Knowing the difference between a factor that ranks and a factor that merely gates is exactly the kind of thing a decade of data reveals and a famous name obscures.
Add gross profitability as a filter on a momentum or value screen, tighten or loosen it, and watch what it removes and what it costs. The metric that disappoints as a ranker may earn its place as a gate. The only way to know is to try it both ways and let the history decide.
Two last checks make the risk concrete: what the basket was actually made of, by company size, and, instead of the single drawdown path, the worst fall you would have suffered no matter which month you started and held for five years.
So we took it to Krest, and ran it through the whole test.
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For education only. Not investment advice or a recommendation to buy, sell, or hold any security, strategy, or product. Past performance does not guarantee future results, and all investing carries risk, including the possible loss of capital. Make your own decisions, and consider consulting a SEBI registered investment adviser.
Best effort analysis. Prepared on a best effort basis from historical data and may contain errors, omissions, or assumptions. Shared for information and discussion only, and should be independently verified before you rely on it. Krest accepts no liability for any decision made or loss incurred based on it.
Figures reflect a gross profitability and value screen (ranked by gross profit to assets and earnings yield, market cap above ₹1,000 cr), reconstructed yearly over the last ten years of Indian data (since June 2016), measured against the Nifty 500 total return index. Concentration, closest index and regime figures computed across all rolling windows. The gross profitability factor was documented by Robert Novy-Marx (2013).
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