@article{Hughen2017,
  title = {Portfolio {{Allocations Using Fundamental Ratios}}: {{Are Profitability Measures Effective}} in {{Selecting Firms}} and {{Sectors}}?},
  author = {Hughen, J. Christopher and Strauss, Jack},
  year = 2017,
  month = apr,
  journal = {Journal of Portfolio Management},
  volume = {43},
  number = {3},
  pages = {87--101},
  issn = {0095-4918},
  doi = {10.3905/jpm.2017.43.3.087},
  abstract = {Our study assesses the performance of portfolios formed using out-of-sample sector forecasts and past firm fundamental ratios. Portfolio allocations based on profitability measures---gross profit, operating profit, and earnings before interest, taxes, depreciation, and amortization (EBITDA)---generate substantially better performance than the benchmark. Long/short portfolio allocations using these fundamentals possess alphas over 14\% and increase Sharpe ratios by over 60\%. A composite variable provides the highest payoff for firm allocations, whereas EBITDA produces the most profitable out-of-sample sector allocations. Profitability metrics are superior indicators of sustainable economic performance because these ratios are more strongly linked to future returns and cash flows than net income.}
}