Uncentive Research Notes & Markets

Non-Traditional Long Only Factor Returns

As a follow up to the factors we explored previously, I wanted to share some very high level analysis I did on various implementations of Long Only Factor portfolios using non-traditional return drivers, such as…

Return Driver Category Core Idea How it is measured Ideal Values are…
High EBIT / EV Growth Earnings before interest and taxes relative to enterprise value EBIT divided by enterprise value High
FCF/Price Value Free cash flow relative to stock price Free cash flow divided by stock price High
Cash/Assets Value Proportion of assets held in cash Cash divided by total assets High
Inventory Change Fundamentals Efficiency of inventory management Change in inventory over a period High
Asset Turnover Fundamentals Efficiency of asset utilization Revenue divided by average assets High
ROE Fundamentals Profitability relative to shareholder equity Net income divided by shareholder equity High
ROA Fundamentals Profitability relative to total assets Net income divided by total assets High
FCF Per Share Fundamentals Amount of free cash flow generated per share Free cash flow divided by number of shares High
EBITDA Margin Fundamentals Operating profitability excluding certain expenses EBITDA divided by revenue High
ROCE Fundamentals Efficiency of capital employed Earnings before interest and taxes divided by capital employed High
Momentum Technical/Price Price trend indicating continued performance in the same direction Rate of change in price over time High
Low Beta Technical/Price Lower beta compared to market Measure of systematic risk relative to market Low
Low Vol Technical/Price Lower volatility compared to market Measure of standard deviation of returns Low
Price/Sales Technical/Price Ratio of market capitalization to total sales Market capitalization divided by total sales High

For each of these return drivers above, I rank all companies in the S&P 500 from best to worst and go long the top 10, rebalancing each month. For example for the first return driver - EBIT / EV - every month I am ranking companies based this ratio and because the “Ideal Values” are high values, I sort companies by EBIT/EV from high to low and go long the “best” 10.

The investment universe is companies in the S&P 500 at the given time in the backtest, who have at least 1 year of price data, and who are not in the top 10% of firms ranked by Beta. There’s evidence to suggest that extremely high beta firms generally don’t do well in the long run so I filter those out across all tests. The backtest periods are from 1 January 2000 to 1 July 2023. I won’t be sharing the nitty gritty details of these factors and their construction but the outcomes in general are indicative I think…

  Avg. Ann. Return Avg. Ann. Std Annual Sharpe Worst Loss 1Y Winning Years
Inventory Change 10.30% 20.50% 0.50 -52.11% 79.17%
Asset Turnover 11.52% 14.74% 0.78 -29.84% 87.50%
ROE 11.42% 17.08% 0.67 -25.21% 79.17%
ROA 9.90% 19.56% 0.51 -49.22% 83.33%
EBIT/EV 9.32% 25.21% 0.37 -52.24% 75.00%
FCF Per Share 12.92% 29.92% 0.43 -96.46% 79.17%
EBITDA Margin 8.76% 23.35% 0.38 -62.64% 70.83%
FCF/Price 10.34% 29.09% 0.36 -70.58% 62.50%
Low Beta 8.87% 11.03% 0.80 -23.18% 83.33%
ROCE 7.36% 17.63% 0.42 -54.32% 83.33%
Momentum 7.37% 24.29% 0.30 -77.60% 75.00%
Low Vol 10.17% 11.43% 0.89 -13.87% 75.00%
Cash/Assets 8.95% 24.97% 0.36 -73.99% 70.83%
Price/Sales 10.35% 28.25% 0.37 -71.79% 75.00%

Of course if you were to implement these yourself, I recommend doing your own research (standard “This is not financial advice” disclaimer here). It’s also important to reiterate that these are 10-position long only portfolios so your mileage will vary if you add more stocks.