If you want to increase your chances of beating the market, one method is to pick stocks that rank highly according to the "Magic Formula" criteria.
Created by Joel Greenblatt (Trades, Portfolio), a well-known 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 designed a little differently than normal. Greenblatt calculates 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 ratios, Magic Formula stocks are further narrowed down to be U.S. stocks with a market capitalization of more than $100 million, as businesses that do not hold these criteria have different capital structures. The Magic Formula also excludes financial and utility businesses for similar reasons.
Below are three stock picks that rank highly on the GuruFocus Magic Formula screener, a screener based on the Magic Formula criteria.
Wayside Technology Group
The first magic formula stock to consider is Wayside Technology Group Inc. (WSTG, Financial). Based in Eatontown, New Jersey, the company is a distributor of technical software and hardware to several professionals and businesses, as well as a reseller of computer software, hardware and technical services to end-user customers.
The stock traded at $24.52 per share at close on May 14 for a market capitalization of $108.03 million. As of the March quarter, it had an earnings yield of 9.43% and a return on capital of 194.17%.
Wayside Technology's earnings yield ranks better than 81% of 2,362 companies operating in the hardware industry, while its return on capital ratio ranks better than 94% of 2,355 competitors.
The share price has risen by 18% over the past year to trade about 12% above the midpoint of the 52-week range of $17.325 to $26.50.
Currently, Wayside Technology pays a quarterly dividend of 17 cents per common share for a trailing 12-month and forward dividend yield of 2.77% as of May 14.
GuruFocus has assigned a score of 7 out of 10 for the company's financial strength and 6 out of 10 for its profitability.
On Wall Street, the stock has one recommendation rating of buy.
Tupperware Brands
The second magic formula stock is Tupperware Brands Corp. (TUP, Financial), an Orlando, Florida-based manufacturer of design-centric preparation, storage and serving solutions for the kitchen and home. The company also manufactures a line of cookware, knives and other products for the kitchen, as well as beauty and personal care products, cosmetics, toiletries, fragrances and nutritional products.
The stock traded at $28.23 per share at close on May 14 for a market capitalization of $1.40 billion. Currently, the earnings yield is 17.18% and the return on capital is 105.90%.
Tupperware Brands' earnings yield ranks higher than 89% of 355 companies operating in the packaging and containers industry, while the return on capital ratio ranks better than 99% of competitors.
The share price has increased by more than 10-fold over the past year, now representing an approximately 27.2% discount to the midpoint of the 52-week range of $2.52 to $38.59.
Currently, Tupperware Brands does not pay dividends as the last quarterly distribution was made on Oct. 4, 2019, consisting in a payment of 27 cents per common share.
GuruFocus has assigned a score of 4 out of 10 for the company's financial strength and 7 out of 10 for its profitability.
On Wall Street, the stock has a median recommendation rating of overweight and an average target price of $39.33 per share.
Innoviva
The third magic formula stock to consider is Innoviva Inc (INVA, Financial), a Burlingame, California-based biotech developer of treatments for chronic obstructive pulmonary disease and asthma.
The stock traded at $12.87 per share at close on May 14 for a market capitalization of $1.31 billion. As of March quarter, it has an earnings yield of 29.50% and a return on capital ratio of 610.52%.
Innoviva's earnings yield and return on capital ratio both rank higher than 98% of 1,391 companies operating in the biotechnology industry.
The share price has declined by nearly 10% over the past year to trade about 3.5% above the midpoint of the 52-week range of $9.21 to $15.62.
Currently, Innoviva does not pay dividends. The last payment of 25 cents was made on Sept. 30, 2015.
GuruFocus has assigned a score of 6 out of 10 for the company's financial strength and 7 out of 10 for its profitability.
On Wall Street, the stock has one buy recommendation rating, two hold recommendation ratings and two underperform recommendation ratings.
Disclosure: I have no positions in any securities mentioned in this article.
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