Omega Point Blog

Profitability is Inflecting

Omer Cedar

Profitability is Inflecting

September 28, 2018

In the past couple of months, we've highlighted how Profitability (a component of Quality), has been Oversold relative to its long-term trend. 

As a reminder, Profitability is a combination of return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets.

Over time, the risk premia for Profitability has been strongly positive (see below), but the factor has seen weakness relative to long term trend over the past ~6 weeks in both our US and Global models. It now appears to be moving back towards the mean. 

Long Term Trend


Global Model 

After bottoming out at -1.83 SD below the mean on September 4th, Profitability has gradually started to revert to the mean. Today, it now sits at -1.28 SD below the mean, and it appears that the past few days have seen a bit of a quicker uptick. 


US Model

We've seen a similar trend for Profitability in the US. Since hitting an August 7th peak of +1.03 standard deviations above the mean (Overbought territory), the factor experienced a divergence from the long term trend on a normalized basis, falling to a September 25 trough of -1.84 SD below the mean. As you can see below, the factor has ticked up over the past two days, now sitting at -1.59 SD below the mean. 


In the US, the sectors that are most correlated to Profitability are Utilities, Consumer Staples, and REITs.

If you'd like to see what Profitability or any other factors look like in your portfolio's performance and risk profile, or would like to better understand how we measure the relationships between factors, please don't hesitate to reach out.


PS - Click here if you'd like to learn more about factor trends