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Myth-Busting: The Profitability Factor Is Profitable

What makes ROE so unique?

Nicolas Rabener
10 min read
1 Dec 2025

SUMMARY

  • Selecting U.S. stocks on profitability metrics failed to generate excess returns
  • Only return-on-equity produced outperformance, but not when equal-weighting stocks
  • Difficult to explain why ROE worked, although it does not seem random

INTRODUCTION

In our recent article Quality versus Growth (read Quality vs Growth Factors), we showed that most portfolios constructed on traditional quality and growth metrics failed to deliver positive excess returns over the past 20 years. This is unsurprising: investors cannot consistently earn more than the market simply by holding stocks with appealing fundamentals – everyone loves these companies!

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