When famed value investor Joel Greenblatt published his little book “The Little Book That Beat The Market”, it was an immediate hit. We started to track the portfolio of Mr. Greenblatt’s hedge fund Gotham Capital. But for the last two years Gotham Capital did not report its portfolio, Magic Formula fans could not track Mr. Greenblatt’s portfolio closely.
To our delight, Mr. Greenblatt started to report his portfolio again. The portfolio consists of 358 stocks with the total value of $306 million on Dec. 31, 2010. As we look into these stocks, we found many of them have the characters of the stocks that would be top ranked in Mr. Greenblatt’s Magic Formula.
If you are not familiar with Mr. Greenblatt’s magic formula, please read his book “The Little Book That Beat The Market”. In summary, the formula ranks stocks with two factors. One is the earning yield of the stocks, the other is return on capital. The magic formula portfolio buys the top 25 ranked stocks and Mr. Greenglatt’s research shows that these stocks outperformed the market by wide margins over long term.
Using this strategy Mr. Greenblatt started a mutual fund company called Formula Investing, and he serves as the portfolio manager. This is how the fund invest:
· We select approximately 75 - 120 stocks from a universe of the largest 1400 U.S. listed securities, as measured by market capitalization.
· Stocks are ranked, selected and weighted based on our assessment of each security's value.
· Portfolio is constantly re-balanced to reflect changes in rankings.
In this article we will discuss the top holdings of Mr. Greengblatt. To check the complete list of Top Holdings of Joel Greenblatt, please go to http://www.gurufocus.com/holdings.php?GuruName=Joel+Greenblatt&tab=top
No. 1: InterDigital Inc. (IDCC), Weightings: 2.44% - 178,979 Shares
InterDigital develops and markets advanced digital wireless telecommunications systems using proprietary technologies for voice and data communications and has developed an extensive patent portfolio related to those technologies. Interdigital Inc. has a market cap of $2.47 billion; its shares were traded at around $55.82 with a P/E ratio of 17.1 and P/S ratio of 8.3. The dividend yield of Interdigital Inc. stocks is 0.7%.
InterDigital Inc. enjoys a ROE of more than 40%, and the P/E ratio was around 11, so it is not surprising that IDCC was top ranked in magic formula. This is also why it was the largest holding in Mr. Green’s portfolio.
IDCC stock has appreciated more than 60% since Mr. Greenblatt bought. It is very likely that Mr. Greenblatt has sold the stock since the rank is much lower now. IDCC will report earnings after today’s market close.
No. 2: SanDisk Corp. (SNDK), Weightings: 2.37% - 145,474 Shares
Sandisk Corporation designs, manufactures, and markets flash memory storage products that are used in a wide variety of electronic systems. Sandisk Corp. has a market cap of $11.46 billion; its shares were traded at around $48.85 with a P/E ratio of 11.3 and P/S ratio of 2.4.
Sandisk Corporation has a ROE of more than 33%, the P/E is about 11. The stock is traded at about where it was 3 month ago. We believe that this stock is still top ranked with magic formula.
So our readers can still buy the stock at what Mr. Greenblatt paid.
No. 3: MCGRAWHILL COMPANIES INC (MHP), Weightings: 2.12% - 177,470 Shares
McGraw-Hill Companies Inc. serves business, professional andeducational markets around the world with information products and services. Mcgrawhill Companies Inc has a market cap of $11.68 billion; its shares were traded at around $38.04 with a P/E ratio of 14 and P/S ratio of 1.9. The dividend yield of Mcgrawhill Companies Inc stocks is 2.5%. Mcgrawhill Companies Inc had an annual average earning growth of 8.4% over the past 10 years. GuruFocus rated Mcgrawhill Companies Inc the business predictability rank of 4.5-star.
Compared with IDCC and SNDK, McGraw-Hill has an even higher ROE, at more than 68%. The PE ratio of 14 is higher. But since magic formula ranks stocks with the combination of return on capital and earning yield, the rank of MHP can be high. The stock price is slightly higher than what Mr. Greenblatt paid. We believe that MHP is still one of the top ranked magic formula stocks.
MHP Director William D Green bought 1,000 shares of MHP stock on 01/24/2011 at the average price of 38.4.
No. 4: OSHKOSH CORP. (OSK), Weightings: 2.03% - 176,158 Shares
Oshkosh Corporation is a designer, manufacturer and marketer of a broad range of specialty access equipment, commercial, fire & emergency and military vehicles and vehicle bodies. Oshkosh Corp. has a market cap of $3.31 billion; its shares were traded at around $36.47 with a P/E ratio of 4.5 and P/S ratio of 0.3.
Oshkosh Corp. carries a lower ROE than the previous three companies, but the P/E ratio is also much lower. Therefore the stock can rank high with magic formula. The stock price is about 20% higher than the average price in the fourth quarter of 2010. It is likely that OSK is still top ranked with magic formula and Mr. Greenblatt still owns it.
No. 5: LORILLARD INC. (LO), Weightings: 1.97% - 73,499 Shares
LORILLARD is the third largest manufacturer of cigarettes in the United States. Lorillard Inc. has a market cap of $11.84 billion; its shares were traded at around $79.12 with a P/E ratio of 11.7 and P/S ratio of 2. The dividend yield of Lorillard Inc. stocks is 5.7%.
Lorrillard is a company that generates so much free cash flow and does not need much capital to operate. ROE does not apply in this case, the company does have a low PE of 11. The return on asset is more than 30%. The stock is traded at lower prices now. You can pay less than Mr. Greeblatt did with this stock.
LO Chairman, President and CEO Murray S Kessler bought 12,500 shares of LO stock on 02/18/2011 at the average price of 79.07. Murray S Kessler owns at least 92,657 shares after this.
No. 6: MEDICIS PHARMACEUTICAL (MRX), Weightings: 1.89% - 215,967 Shares
Medicis is an independent pharmaceutical company focusing exclusively on the treatment of dermatological conditions. Medicis Pharmaceutical has a market cap of $1.64 billion; its shares were traded at around $27.1 with a P/E ratio of 11.5 and P/S ratio of 2.9. The dividend yield of Medicis Pharmaceutical stocks is 0.9%.
The return on equity of Medicis is about 13%. With the P/E ratio of 11.5, the stock may not rank very well with magic formula. But the company does have very strong balance sheet and great free cash flows. Again you can buy this stock at lower prices than Mr. Greenblatt paid.
To check the complete list of Top Holdings of Joel Greenblatt, please go to http://www.gurufocus.com/holdings.php?GuruName=Joel+Greenblatt&tab=top