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High-GP/A Canadian Stock Portfolio Outperforms Market
A Canadian portfolio of the top 20% of non-financial TSX 100 stocks by gross profit to assets ratio (GP/A) achieved an average annual return of 11.6% over 25 years, outperforming the TSX Composite, while the top 100 TSX stocks gained 9.3% annually over the same period. This suggests profitability as a key factor in stock selection.
- What is the impact of using gross profitability (GP/A) as a measure for selecting Canadian blue-chip stocks?
- A study by Professor Robert Novy-Marx showed that a high gross-profits-to-assets ratio (GP/A) is a strong indicator of stock performance. A portfolio of the top 20% of non-financial TSX 100 stocks by GP/A achieved an average annual return of 11.6% over 25 years, exceeding the TSX Composite's 6.8% return. This outperformance was even more pronounced in recent years, with a 5.7 percentage point advantage annually over the last 15 years.
- How does the performance of a portfolio of high-GP/A stocks compare to a broader market index, and what factors contribute to this difference?
- The superior performance of the high-GP/A portfolio highlights the importance of profitability in stock selection. By focusing on large, profitable Canadian companies (excluding financials), investors can potentially achieve higher returns than investing in the broader market. This strategy suggests that a focus on profitability, rather than solely size, is key for superior returns.
- What are the potential risks and limitations of using GP/A as a primary criterion for stock selection, and what additional factors should investors consider?
- While the profitability portfolio shows strong historical performance, its higher P/E ratios and growth orientation suggest higher risk. Future performance may depend on continued high earnings growth and sustained investor interest in growth stocks. The relatively low dividend yield (1.1%) might also deter income-focused investors. Further research into other quality measures is warranted to refine this approach.
Cognitive Concepts
Framing Bias
The article frames profitability, and specifically the GP/A ratio, as a superior and almost foolproof method for identifying high-performing stocks. The positive results of the profitability portfolio are prominently featured, potentially downplaying or overlooking potential risks associated with focusing exclusively on this metric. The headline and introduction set a positive tone, emphasizing the potential for high returns. While acknowledging limitations in data, this is presented as a minor caveat rather than a significant qualification of the findings.
Language Bias
The language used is generally neutral but leans toward positive descriptions of the profitability portfolio's performance. Phrases such as "nice return boost" and "performed well" are used to describe the results. While not overtly biased, these phrases could be replaced with more neutral terminology for greater objectivity (e.g., 'returned X percent' instead of 'performed well').
Bias by Omission
The analysis focuses heavily on profitability as a measure of blue-chip stocks, potentially omitting other relevant factors that contribute to a company's overall quality or suitability for investment. It also excludes financial stocks, a significant portion of the Canadian market, without extensive justification for this exclusion beyond data limitations. The long-term performance data is presented but lacks details about market conditions during specific periods, which could provide additional context for interpreting the results.
False Dichotomy
The article presents a somewhat false dichotomy by implying that focusing solely on profitability (specifically, the GP/A ratio) is the primary or optimal method for identifying blue-chip stocks. It acknowledges the lack of hard and fast rules but strongly emphasizes this single metric. Other factors, such as company size, stability, and industry context, are mentioned but not given equal weight.
Sustainable Development Goals
The article focuses on strategies for improving investment returns, particularly through identifying high-profitability stocks. This directly relates to economic growth by suggesting methods to enhance corporate profitability and potentially stimulate investment and job creation. Higher returns can lead to increased capital for businesses, facilitating expansion, innovation, and job opportunities.