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The Mysterious Factor "P"


Parsad

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Guest hellsten

 

Thanks. Are there any online screeners that include gross profits-to-assets?

 

Right now it is harder to get than simple valuation ratios like book-to-price or earnings-to-price, but gross profits-to-assets is just as easy to compute, and there are more and more websites making it available for more and more firms. I think that gross profits-to-assets is the single best simple quality metric, but that it is itself just a proxy for something that is more subtle and complicated. But just like simple, single measure value metrics cannot hope to perform as well as metrics that combine multiple value signals, the best quality metric is going to incorporate other signals as well.

 

Is this high-quality metric as simple as taking the gross profit and dividing it by total assets? I calculated gross profits-to-assets using Morningstar data for a few stocks I have been looking at recently and some other companies:

 

PT 2012:

5323/20096=0.26

 

PT 2009:

5001/14831=0.34

 

TEF 2012:

46605/129773=0.36

 

TEF 2009:

41659/108141=0.39

 

OIBR 2012:

12496/69077=0.18

 

OIBR 2009:

4973/22756=0.22

 

MSFT 2012:

56193/108704=0.52

 

GOOG 2012:

29541/93798=0.31 is surprisingly low, maybe Google is just a telecom :)

 

AAPL 2012:

68662/176064=0.38

 

WTW 2012:

1083/1219=0.89

 

Probably some manual errors here and there, but it's clear that MSFT and WTW are of higher quality than telecoms. OIBR is fixed-line vs mobile, fixed-line, etc for PT and TEF, so maybe you could say that OIBR is of lower quality right now.

 

The quality of MSFT has probably been dropping as fast as they have been diworsifying, but it's still better than everyone's favorite Google and Apple. So is MSFT of higher quality than both Google and Apple? I would say yes.

 

Railroads are quite similar to telecoms, but they don't have to constantly upgrade their networks and technology:

 

Canadian National Railway 2012:

6899/26659=0.26

 

Canadian Pacific Railway Ltd 2012:

3518/14727=0.24

 

Comparing OSTK to AMZN:

 

OSTK 2012:

198/182=1.09

 

AMZN 2012:

15122/32555=0.46

 

OSTK's business model certainly doesn't require a lot of assets.

 

FIAT 2012:

12483/82119=0.15

 

BMW 2012:

15494/131850=0.12

 

Volkswagen 2012:

35158/309644=0.11

 

Is Fiat of higher quality than BMW and Volkswagen? If they increase the utilization of all of their assets then they might be.

 

Natural gas (and oil) companies :'(

 

SD 2012:

1302/9791=0.13

 

CHK 2012:

5235/41611=0.12

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I was working on the numbers on apple quickly. Regarding MSFT and Apple one has to remember cash horded at apple for the last 13 years which now is being distributed. Should improve that  P number.  And the P number is one value metric but as Magic formula works one has to way other metric oneself decide and see whats cheap.

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Guest hellsten

Link to paper done by Mr. Robert Novy-MarxŽ

 

http://rnm.simon.rochester.edu/research/OSoV.pdf

 

Thanks. A lot of the findings sound like what Warren and Charlie have been doing:

 

while trading on gross

profits-to-assets exploits a value philosophy, the resulting strategy is a growth strategy

as measured by either characteristics (valuation ratios) or covariances (HML loadings).

 

shows that a simple trading strategy based on

gross profits-to-assets and book-to-market generates average excess returns of almost eight

percent per year. It does so despite trading only infrequently, in only the largest, most liquid

stocks.

 

high gross margins are the distinguishing characteristic of “good growth” stocks.

 

Gross profitability is a powerful predictor

of future growth in gross profitability, earnings, free cash flow and payouts (dividends plus repurchases) at both three and ten year horizons (see Appendix A.5).

 

Profitability generally

performed well in the periods when value performed poorly, however, while value generally

performed well in the periods when profitability performed poorly. As a result, the mixed

profitability-value strategy never had a loosing five year period over the sample (July 1963

to December 2010).

 

"Fig. A.1. Persistence of profitability strategy performance" shows that it's wise to hold a stock for at least 2-5 years.

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Guest hellsten

More gross-profit-to-assets data…

 

For-profit education:

 

CECO

 

2012:

918/1123=0.82

 

2010:

1485/1561=0.95

 

COCO 2012:

631/1065=0.6

 

DV 2012:

1114/1839=0.6

 

APOL 2012:

2453/2868=0.85

 

STRA 2012:

262/228=1.15

 

STRA 2011:

335/231=1.45

 

STRA 2010:

432/413=1.05

 

STRA looks really good, but is also priced a lot higher than APOL.

 

Retail:

 

SHLD

 

2012:

10601/21381=0.49

 

2011:

11878/24268=0.49

 

WMT

 

2012

111823/193406=0.58

 

2011

106562/180663=0.59

 

COST

 

2012

12314/27140=0.45

 

2011

11176/26761=0.42

 

Media:

 

LEE:

658/1061=0.62

 

WPO:

2137/5105=0.41

 

GVC - Glacier Media:

 

2012:

110/624=0.18

 

2011:

99/594=0.17

 

The formula is (AFAIK):

gross-profits-to-assets = revenues - cost of goods sold (Compustat REVT - COGS) / total assets

 

Maybe someone with Compustat or something similar can provide us with a list of the most interesting companies and industries?

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Guest hellsten

  • Gross Profit/TA > 70% for 2012 2011 2010 2009
  • FCF/EV as indication of "yield"

 

Some numbers are obviously from nano/micro caps and widely distorted.

 

Thank you!

 

USANA Health Sciences USNA and Select Comfort Corporation SCSS are at the top of the list of US-based companies after filtering out EV < $100 million. SCSS is a 100-bagger since 2009. The stock has a history of crazy volatility. I'll try to go through as many as possible as a learning experience  :)

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