Magic Formula Stocks - Joel Greenblatt

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What is Joel Greenblatt Magic Formula?


Joel Greenblatt is Background A widely respected hedge-fund manager. Joel Greenblatt, started as a value purist but was influenced by Warren Buffett's view about growth being part of the value equation. He founded Gotham Capital, a fund which apparently returned over 40% annualized from 1985 to 2005. By 1995, it had returned all money to its outside investors. He has authored two books, "You Can Be a Stock Market Genius" and New York Times bestsellier, "The Little Book That Beats the Market," and is also adjunct professor at Columbia University Business School. Greenblatt espouses MFI as a do-it-yourself version of the approach he has used while amassing his investment track record. With the "Little Book," Greenblatt wanted to write a book his children could read and learn from. The main point Greenblatt makes is that investors should buy good companies at bargain prices.

Magic Formula Investing uses return on capital and earnings yield as its inputs. Return on capital is seen as the best determinant of whether a business is a good one or not. Companies that can earn a high ROC over time generally have a special advantage that keeps competition from destroying it (e.g., name recognition, a new product that is hard to duplicate or a unique business model).

Earnings yield is the metric that shows whether a company is cheap or not. Greenblatt says that stock prices of a firm can experience "wild" swings even as the value of the company stays relatively constant giving investors opportunities to buy low and sell high.

Calculation/Definition of the Magic Formula:

1. Define minimum Market Capitalization that meets your liquidity needs. Greenblatt used a market capitalization floor of $50 million, but advised that you can set the minimum as high as $5 billion.
2. Sector Filter: Due to their unique financial structures, all stocks in the financial and utility sectors are excluded. Calculate Earnings Yield = EBIT / enterprise value.
3. Calculate Return on Capital = EBIT / (Net fixed assets + working capital)
4. EY Rank: Rank the stocks in descending order based on Earnings Yield and assign a rank number to each.
5. ROC Rank: Rank the same stocks in descending order based on Return on Capital and assign a rank number to each.
6. Add the rankings and select stocks that have the lowest combined ranking score. So a company that is ranked 358nd best in terms of ROC and 122rd highest in EY would gets a better combined ranking (i.e., 470) than a company that is ranked 1st in ROIC but only 950th best in EY (i.e., 951).

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Symbol Company Predictability Market Cap ($mil) Earnings Yield (%) Return on Capital (%) 10-Y EBITDA Growth Rate (%) 5-Y EBITDA Growth Rate (%) P/E Yield (%) Rank
Premium Member OnlyPremium Member Only
  • Currently 1/5
Business Predictability Rank: 1-Star (On Watch)
Back Testing Results:
Average gain of all 1-Star stocks: 1.1% per year.
% of Stocks that are in still loss if held for 10yrs: 45%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
32.80332.10265.320.00 0.000.000.0061
Premium Member OnlyPremium Member Only 27311.43121.70667.010.00 0.003.802.1462
Premium Member OnlyPremium Member Only 26083.95121.60667.010.00 0.003.902.4463
Premium Member OnlyPremium Member Only 27042.92021.10667.010.00 0.004.002.1664
Premium Member OnlyPremium Member Only 104.32519.102460.200.00 0.007.601.5565
Premium Member OnlyPremium Member Only 1106.41027.70249.560.00 0.0023.301.4766
Premium Member OnlyPremium Member Only 402.61019.80810.640.00 50.806.302.7767
Premium Member OnlyPremium Member Only
  • Currently 1/5
Business Predictability Rank: 1-Star
Back Testing Results:
Average gain of all 1-Star stocks: 1.1% per year.
% of Stocks that are in still loss if held for 10yrs: 45%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
467.93318.701082.530.00 16.508.602.5268
Premium Member OnlyPremium Member Only 648.91917.106345.470.00 0.009.300.0069
Premium Member OnlyPremium Member Only 10698.55434.40181.190.00 0.006.801.2770
Premium Member OnlyPremium Member Only 34.81719.702555.590.00 0.000.800.0071
Premium Member OnlyPremium Member Only 0.000555.6096.660.00 0.002.300.0072
Premium Member OnlyPremium Member Only 292.95537.00165.190.00 0.007.402.4973
Premium Member OnlyPremium Member Only 15323.56819.60798.630.00 59.3019.104.0574
Premium Member OnlyPremium Member Only 13925.08419.60798.630.00 59.3019.104.1175
Premium Member OnlyPremium Member Only 17.205560.3093.420.00 -17.402.200.0076
Premium Member OnlyPremium Member Only
  • Currently 1/5
Business Predictability Rank: 1-Star
Back Testing Results:
Average gain of all 1-Star stocks: 1.1% per year.
% of Stocks that are in still loss if held for 10yrs: 45%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
1544.37826.60208.38-0.80 16.4020.706.7977
Premium Member OnlyPremium Member Only 4189.50416.9010838.430.00 0.005.501.9778
Premium Member OnlyPremium Member Only 174.76926.20207.160.00 0.0011.601.0879
Premium Member OnlyPremium Member Only 153.46367.60105.700.00 0.006.700.0080
Premium Member OnlyPremium Member Only 25.24628.50167.830.00 0.0074.304.8181
Premium Member OnlyPremium Member Only 2965.88071.90100.600.00 0.0013.102.0182
Premium Member OnlyPremium Member Only
  • Currently 1/5
Business Predictability Rank: 1-Star
Back Testing Results:
Average gain of all 1-Star stocks: 1.1% per year.
% of Stocks that are in still loss if held for 10yrs: 45%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
1427.78217.101003.600.00 0.006.100.0083
Premium Member OnlyPremium Member Only 1065.17819.30322.410.00 0.000.000.0084
Premium Member OnlyPremium Member Only
  • Currently 1/5
Business Predictability Rank: 1-Star (On Watch)
Back Testing Results:
Average gain of all 1-Star stocks: 1.1% per year.
% of Stocks that are in still loss if held for 10yrs: 45%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
51.37925.20193.50-0.40 10.904.100.0085
Premium Member OnlyPremium Member Only 12097.95865.2098.740.00 -10.300.100.0086
Premium Member OnlyPremium Member Only 12681.29866.3098.740.00 -10.300.100.0087
Premium Member OnlyPremium Member Only
  • Currently 1/5
Business Predictability Rank: 1-Star
Back Testing Results:
Average gain of all 1-Star stocks: 1.1% per year.
% of Stocks that are in still loss if held for 10yrs: 45%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
349.40115.602421.950.00 0.004.900.0088
Premium Member OnlyPremium Member Only
  • Currently 4/5
Business Predictability Rank: 4-Star
Back Testing Results:
Average gain of all 4-Star stocks: 9.8% per year.
% of Stocks that are in still loss if held for 10yrs: 8%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
86390.27723.40162.524.20 13.8014.203.4689
Premium Member OnlyPremium Member Only 139.18818.90323.370.00 0.0010.604.3890

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