If you want to increase your chances of beating the market, one method is to select stocks that rank highly according to the "Magic Formula" criteria.
Designed by Joel Greenblatt (Trades, Portfolio), a prominent value investor and author of "The Little Book That Beats the Market," the Magic Formula ranks stocks based on a specific array of technical criteria, the most important being the earnings yield and the return on capital.
In Greenblatt's book, these two financial ratios are built a little differently than normal. Greenblatt computes the earnings yield as earnings before interest and taxes (Ebit) divided by the enterprise value, while the return on capital is Ebit divided by net fixed assets and working capital.
In addition to high values in these two financial indicators, Magic Formula stocks are further narrowed down to be U.S. stocks with a market capitalization above $100 million, because businesses that do not match these criteria have different capital structures. The Magic Formula also excludes financial and utility businesses for similar reasons.
Below are three of my stock picks that rank highly on the GuruFocus Magic Formula screener, a screener based on the Magic Formula criteria.
CGI
The first stock that investors may want to consider is CGI Inc. (GIB, Financial), a Montreal, Canada-based provider of information technology and business process services in North America and internationally.
The stock traded at $76.41 per share at close on Feb. 19 for a market capitalization of $19.32 billion, an earnings yield of 5.87% (as of the December 2020 quarter) and a return on capital of 195.04%.
CGI's earnings yield ranks higher than 80% of 2,331 companies operating in the software industry, while its return on capital ratio ranks higher than 86% of 2,281 competitors.
The share price has risen by 3.13% over the past year to trade about 19.54% above the midpoint of the 52-week range of $46.32 to $81.51.
Currently, CGI does not pay dividends.
GuruFocus has assigned a score of 6 out of 10 for the financial strength rating and 8 out of 10 for the company's profitability rating.
On Wall Street, the stock has a median recommendation rating of overweight.
Endo International
The second stock that investors may want to consider is Endo International PLC (ENDP, Financial), a generic and branded drug manufacturer in the U.S. and internationally.
Shares closed at $10.5 on Feb. 19 for a market capitalization of $2.42 billion, an earnings yield of 3.99% and a return on capital of 53.41%.
Endo International's earnings yield ranks higher than 59% of 1,068 companies operating in the drug manufacturers industry, while the return on capital ratio ranks better than 90% of 1,055 competitors.
The share price has risen by 75% over the past year to trade about 62% above the midpoint of the 52-week range of $2.08 to $10.89.
Currently, Endo International does not pay dividends.
GuruFocus has assigned a score of 2 out of 10 for the financial strength rating and 5 out of 10 for the profitability rating of the company.
On Wall Street, the stock has a median recommendation rating of hold.
SIGA Technologies
The third stock investors may want to consider is SIGA Technologies Inc. (SIGA, Financial), a New York-based biotechnology company whose flagship product is an orally administered antiviral drug to treat human smallpox disease caused by the variola virus.
The stock closed at $6.37 per share on Feb. 19 for a market capitalization of $493.04 million, an earnings yield of 10.40% and a return on capital ratio of 324.38%.
SIGA Technologies' earnings yield ranks higher than 98% of 1,351 companies operating in the biotechnology industry, while the return on capital ratio ranks better than 96% of 1,284 competitors.
The share price has risen by 39.39% over the past year to trade about 5.64% above the midpoint of the 52-week range of $3.96 to $8.10.
Currently, SIGA Technologies does not pay dividends.
GuruFocus has assigned a score of 8 out of 10 for the financial strength rating and 3 out of 10 for the profitability rating.
On Wall Street, the stock has one recommendation rating of buy.
Disclosure: I have no positions in any securities mentioned in this article.
Read more here:
- 3 Stocks Trading Below Intrinsic Value
- A Trio of Stock Picks for a 'Buy and Hold' Approach
- 3 Capital-Intensive Stocks to Consider
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