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 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
12098.1904.9235.0417.30 28.0037.891.1898
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
11553.6208.4810.43-20.90 -5.3019.291.28130
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
2759.6809.1031.790.00 0.0016.300.1646
Premium Member OnlyPremium Member Only
  • Currently 2/5
Business Predictability Rank: 2-Star
Back Testing Results:
Average gain of all 2-Star stocks: 6% per year.
% of Stocks that are in still loss if held for 10yrs: 16%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
1740.8408.108.069.90 1.1016.300.00148
Premium Member OnlyPremium Member Only 529.0803.8326.620.00 0.0036.320.00141
Premium Member OnlyPremium Member Only
  • Currently 5/5
Business Predictability Rank: 5-Star
Back Testing Results:
Average gain of all 5-Star stocks: 12.1% per year.
% of Stocks that are in still loss if held for 10yrs: 3%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
6422.4406.0039.5729.90 35.2018.702.3775
Premium Member OnlyPremium Member Only
  • Currently 5/5
Business Predictability Rank: 5-Star
Back Testing Results:
Average gain of all 5-Star stocks: 12.1% per year.
% of Stocks that are in still loss if held for 10yrs: 3%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
6832.59013.4539.5729.90 35.2018.212.1774
Premium Member OnlyPremium Member Only 846.88013.3013.410.00 12.603.900.0066
Premium Member OnlyPremium Member Only 5.7203.3010.460.00 0.00N/A0.00196
Premium Member OnlyPremium Member Only 2699.1106.8028.990.00 0.0018.002.1083
Premium Member OnlyPremium Member Only 169.3604.003.880.00 -5.9016.200.00181
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
26187.56014.6021.760.00 0.006.661.0333
Premium Member OnlyPremium Member Only
  • Currently 3.5/5
Business Predictability Rank: 3.5-Star
Back Testing Results:
Average gain of all 3.5-Star stocks: 9.3% per year.
% of Stocks that are in still loss if held for 10yrs: 9%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
3472.2206.0020.445.80 10.8020.900.00116
Premium Member OnlyPremium Member Only
  • Currently 5/5
Business Predictability Rank: 5-Star
Back Testing Results:
Average gain of all 5-Star stocks: 12.1% per year.
% of Stocks that are in still loss if held for 10yrs: 3%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
2732.5806.9427.1211.10 12.2022.470.2485
Premium Member OnlyPremium Member Only 5852.3106.0016.270.00 0.0023.102.77140
Premium Member OnlyPremium Member Only 311.6802.558.190.00 0.0043.450.00180
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
1121.4706.3446.9813.50 13.2027.230.9765
Premium Member OnlyPremium Member Only
  • Currently 4.5/5
Business Predictability Rank: 4.5-Star
Back Testing Results:
Average gain of all 4.5-Star stocks: 10.6% per year.
% of Stocks that are in still loss if held for 10yrs: 10%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
12831.3606.1536.9814.40 16.9025.620.1476
Premium Member OnlyPremium Member Only
  • Currently 4.5/5
Business Predictability Rank: 4.5-Star
Back Testing Results:
Average gain of all 4.5-Star stocks: 10.6% per year.
% of Stocks that are in still loss if held for 10yrs: 10%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
643038.92010.43348.0258.00 40.5013.041.777
Premium Member OnlyPremium Member Only 1067.44011.6060.370.00 0.0018.900.0013
Premium Member OnlyPremium Member Only 1729.9003.245.170.00 12.1059.712.38182
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
952.5607.107.990.00 0.0018.110.00153
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
1034.93010.328.013.40 7.608.150.00120
Premium Member OnlyPremium Member Only
  • Currently 3.5/5
Business Predictability Rank: 3.5-Star
Back Testing Results:
Average gain of all 3.5-Star stocks: 9.3% per year.
% of Stocks that are in still loss if held for 10yrs: 9%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
1068.1504.0052.2513.10 10.1036.140.8797
Premium Member OnlyPremium Member Only
  • Currently 2/5
Business Predictability Rank: 2-Star
Back Testing Results:
Average gain of all 2-Star stocks: 6% per year.
% of Stocks that are in still loss if held for 10yrs: 16%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
42881.4207.1045.534.40 1.9022.270.9154
Premium Member OnlyPremium Member Only 103305.8102.7681.250.00 0.0049.463.09108
Premium Member OnlyPremium Member Only 21628.8600.419.620.00 4.40N/A1.16185
Premium Member OnlyPremium Member Only 237.2503.7463.960.00 0.00N/A0.0095
Premium Member OnlyPremium Member Only
  • Currently 3.5/5
Business Predictability Rank: 3.5-Star
Back Testing Results:
Average gain of all 3.5-Star stocks: 9.3% per year.
% of Stocks that are in still loss if held for 10yrs: 9%.
Read more:
What is Predictability Rank?
Performances of real portfolio
Top Ranked Predictable Companies
2069.6100.205.207.00 19.20N/A0.00193
Premium Member OnlyPremium Member Only
  • Currently 3/5
Business Predictability Rank: 3-Star
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
1825.5501.67159.9739.20 19.0036.381.3570

Add Notes, Comments

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User Comments

Jsmoshowitz@google
ReplyJsmoshowitz@google - 4 months ago
Was just wondering why the screen chooses a one year holding period, it seems quite arbitrary to me. I feel that if a stock were to have large gains, say 30%, wouldn't it be wiser to lock in those gains and sell right away, instead of waiting out the full year…?
Paulmenezes
ReplyPaulmenezes - 7 months ago
When I click on the screener, it automatically has 30 ranked stocks?

Is this just a list of 30 stocks or actually 30 best choices formula wise?
Riching
ReplyRiching - 9 months ago
The ranking is different from magicformula is likely because gurufocus used an alternative way to calculate the "earnings yield" and "return on capital". For example, Joe recommended to use EV/EBITDA (although P/E is widely available). Similarly, he mentioned various ways to calculate return on capital (one of the simple way is return on assets or ROIC, but there are better ways to calculate as he mentioned in the book)
Stephen Neumeier
ReplyStephen Neumeier - 11 months ago
The settings should allow us to exclude sectors, market cap, etc. It seems like we can only include a sector or market cap.
Ashimkar
ReplyAshimkar - 1 year ago
Magic Formula stocks , when I read Greenblatt, never included financial , commodities and foreign stocks.

I see Royal Bank listed in Guru Focus' version of Magic Formula stocks. This is a Canadian bank. Can somebody explain how the financial stocks, that too foreign, ended up in this list?

I am more than happy to buy these outstanding Canadian banks but are they really Magic Formula stocks?
Marco42
ReplyMarco42 - 1 year ago
Steveoliveira@yahoo,
Marco42
ReplyMarco42 - 1 year ago
Good point Steveoliveira@yahoo. And why charge for something which is openly free by the person who developed the model, and who provides the results for free?
Steveoliveira@yahoo
ReplySteveoliveira@yahoo - 1 year ago
Why these stocks on the magic screener doesn't match with the ones that are shown in the magicformulainvesting site?



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