A Cheap and Profitable Screen

I reviewed the recent academic work of Robert Novy-Marx on Thursday. In his paper, "The Other Side of Value: Good Growth and the Gross Profitability Premium," the University of Rochester professor looked at historical returns from stocks with very high levels of gross profitability, and he found that they performed as well as stocks trading at a low price-to-book value. Combining the two types of stocks in your portfolio outperformed the market. Novy-Marx went even deeper and found that if you buy stocks below book value that also have high levels of gross profitability, you produce a portfolio of super-value stocks that consistently beat the market.

Being a bit of a skeptic, I conducted some quick back tests of his theory and found huge excessive returns. In the last year alone the big-cap, value-profitable stocks returned 45% while the small-cap stocks in the portfolio were up 54%. That is impressive performance, so I quickly built a screen that looked for cheap stocks that have very high gross profits compared to their asset base....613 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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