Gross Profitability (GP/assets)

The three-gate gauntlet · genuine only if it clears all three and survives adversarial refutation

Gate 1

Survivorship-free

free

clean panel

Gate 2

Placebo ≥ P95

P99

outranked ~198 of 200 baskets

Gate 3

Cost-aware net

RF +0.56

positive, not certified

Failedfailed refutation

Worst 12-month leg (RF)-0.69

−1.00 floor0

Every strategy here — winners included — loses in its worst 12 months. Depth is honest context, not the verdict.

Cleared the numeric checkpoints it reached but failed adversarial refutation — the positive figure is market beta or a single-period jackpot, not a repeatable edge.

Gross profitability, introduced by Novy-Marx (2013) in "The Other Side of Value: The Gross Profitability Premium", goes long firms with high gross profits scaled by total assets and short low-gross-profitability firms, on the finding that gross profit is a cleaner measure of economic "quality" than bottom-line earnings and predicts the cross-section of stock returns.

What we found

This is one of the rare failed factors with genuine, measurable rank-skill. On our survivorship-free US common-stock panel the real construction beat 99% of random baskets (placebo P99), so the ranking is not luck — the signal is statistically real. But statistical significance is not the same as investability. The risk-adjusted RF is only 0.56, below 1, meaning the after-cost, drawdown-adjusted payoff is too weak to trade as a market-neutral long/short spread, and the worst year is still a loss (worst-year RF -0.69). The lesson is the one this whole audit keeps returning: rank-skill is not investability. A factor can be provably real and still fail to clear the cost hurdle in tradeable form.

How we tested it

2005–2026 test windowmodelled liquidity-aware costssurvivorship free

Data: survivorship-free 1077-name US common-stock panel, 2005-2026. Liquidity-aware modelled costs.
Placebo / robustness test: real result vs 200 random baskets (real vs the random-basket percentile).

Source: Novy-Marx (2013), "The Other Side of Value: The Gross Profitability Premium", Journal of Financial Economics
Find the paper (Google Scholar) ↗

← The Academic Audit — all 57 studies

Research, not investment advice. “Validated” factor-legs are market-neutral diversifying building blocks with a losing worst year — none is a standalone tradeable strategy. Metrics are cost-aware and modelled (not live fills); the 2005–2026 test window is out-of-sample versus the source paper. Dollar figures are not returns and are omitted by design.