Multi-factor Stock Selection Strategy: Value, Profitability, and Momentum

Abstract

This study examines whether sequentially combining value, profitability, and momentum improves stock-selection performance in the U.S. equity market. Utilize company-level accounting and monthly return data from Compustat and Center for Research in Security Prices (CRSP) to build annually rebalanced, equally weighted portfolios of the 600 largest eligible firms over the 2016-2024 formation period for the analysis. Stocks are first screened by book-to-market ratio, then by return on equity, and finally by 12–1 momentum. Portfolio performance is shown by annualized return, volatility, the return-to-volatility ratio and maximum drawdown. The added factors do not always improve performance, according to the results. The value portfolio has an annual return of 10.39%, rises slightly to 10.74% after adding profitability, and then falls to 10.36% after the momentum screen. All factor-screened portfolios underperform the 11.50% return of the Top-600 benchmark and have higher volatility and larger drawdowns. Robustness tests using gross profit-to-assets and earnings-to-price also show that the results are sensitive to factor definitions and screening order. These findings caution against assuming that greater model complexity necessarily enhances performance. Overall, multi-factor performance depends on factor measurement, sequencing, and portfolio concentration.