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 441.22718.80349.610.00 0.005.601.80151
Premium Member OnlyPremium Member Only 2536.90063.7073.990.00 14.207.300.00152
Premium Member OnlyPremium Member Only 153.46328.90105.700.00 0.006.600.00153
Premium Member OnlyPremium Member Only 756.64942.6081.250.00 11.1026.500.00154
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
27576.90214.901001.2512.40 19.909.402.40155
Premium Member OnlyPremium Member Only 3309.06813.6069535.650.00 7.609.803.70156
Premium Member OnlyPremium Member Only 28.35128.80101.200.00 63.508.300.00157
Premium Member OnlyPremium Member Only 48.97715.001244.440.00 0.0010.200.00158
Premium Member OnlyPremium Member Only 323.10127.80104.710.00 3.207.006.30159
Premium Member OnlyPremium Member Only 343.75014.601187.510.00 0.0013.105.90160
Premium Member OnlyPremium Member Only
  • Currently 2.5/5
Business Predictability Rank: 2.5-Star
Back Testing Results:
Average gain of all 2.5-Star stocks: 7.3% per year.
% of Stocks that are in still loss if held for 10yrs: 18%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
835.10013.903100.6515.60 15.0011.501.10161
Premium Member OnlyPremium Member Only 430.40017.50255.580.00 50.709.801.10162
Premium Member OnlyPremium Member Only 1744.84814.70904.720.00 8.507.100.00163
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
102.91016.70279.900.00 0.0011.700.00164
Premium Member OnlyPremium Member Only 7360.00034.4082.600.00 0.003.503.10165
Premium Member OnlyPremium Member Only 14440.00033.7082.600.00 0.003.602.80166
Premium Member OnlyPremium Member Only 15955.59616.20209.83-9.80 37.8014.203.80167
Premium Member OnlyPremium Member Only 15859.93618.40209.83-9.80 37.8012.504.10168
Premium Member OnlyPremium Member Only 202.84415.70387.930.00 19.8013.402.80169
Premium Member OnlyPremium Member Only
  • Currently 4/5
Business Predictability Rank: 4-Star (On Watch)
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
538.98714.30879.5338.70 15.609.301.10170
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
89.09747.3071.991.80 14.400.902.40171
Premium Member OnlyPremium Member Only 95.25957.9067.040.00 0.0012.300.00172
Premium Member OnlyPremium Member Only 38.92612.40915.790.00 0.0023.300.00173
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
1150.42521.30125.641.20 -16.0025.100.00174
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
10.01313.602581.407.70 0.8013.005.70175
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
340.86015.60369.522.20 4.4011.803.50176
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
36.384128.9058.190.00 0.003.600.00177
Premium Member OnlyPremium Member Only 1683.80021.40122.020.00 0.006.005.80178
Premium Member OnlyPremium Member Only
  • Currently 3/5
Business Predictability Rank: 3-Star (On Watch)
Back Testing Results:
Average gain of all 3-Star stocks: 8.2% per year.
% of Stocks that are in still loss if held for 10yrs: 11%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
1720.46017.20201.0340.10 4.3015.101.20179
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
14.75266.2062.064.50 2.2011.500.00180

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