Gross Profitability and Momentum: Evidence from India

This study investigates the joint impact of an investment strategy that integrates gross profitability and the 52-week high price indicator within the context of the Indian stock market. This study uses an empirical approach commonly found in asset pricing literature. The analysis incorporates data from October 2002 to September 2022. Firms are classified into tercile portfolios according to their profitability and momentum metrics, and their overall performance is assessed using an independent double-sorting methodology. The empirical analysis presents results for both value-weighted and equally weighted portfolio returns. A combined long-short strategy yields an equally weighted monthly return of 0.32%, accompanied by a corresponding Fama-French alpha of 1.08%. The equally weighted return is approximately 1.79 times greater than that of the standalone profitability strategy and nearly equivalent to that of the standalone 52-week high-momentum strategy. This highlights the enhanced performance of the combined approach relative to the individual strategies, particularly in terms of risk-adjusted returns. In recent years, increasing attention has been paid to multifactor investment strategies. This study demonstrates that integrating two significant factors, profitability and momentum, enhances portfolio performance. The first study to investigate the synergistic effects of combining profitability and momentum, offers empirical evidence supporting the superior outcomes of such a strategy. However, this area remains underexplored, particularly in the context of the Indian market.