How Does Quality Work?

Verdad

Greg Obenshain

Research

6 Pages

Verdad examines why the quality factor has historically outperformed, focusing on profitability as the defining feature and questioning what truly drives excess returns. The paper argues that returns are less about static quality and more about how profitability evolves over time, particularly through asset growth dynamics that many investors overlook.

Key Takeaways

Asset Growth Drives Returns: High profitability firms that grow assets generate excess returns, with top GP/A quintile firms outperforming by roughly 5–6% annually.
Valuation Not Primary Driver: Multiple expansion contributes minimally, with most returns coming from fundamental growth rather than changes in EV/GP multiples over long periods.
Quality Value Interaction: Cheap high-quality stocks outperform expensive ones by about 3–4% annually, highlighting valuation sensitivity within the quality factor.
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