# 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
• Currently 1/5
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%.

97.1805.961154.440.00 0.0021.150.0036
• Currently 2.5/5
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%.

475.5909.3519.399.30 0.4019.630.0055
34670.5603.8947.430.00 12.9037.460.5997
12363.1204.5885.240.00 0.0033.420.0043
• Currently 1/5
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%.

23455.7803.1417.060.00 0.00N/A0.00159
• Currently 1/5
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%.

24041.4003.0017.060.00 0.00N/A0.00158
• Currently 1/5
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%.

367.5901.230.810.00 0.00N/A4.24190
1015.0205.97579.640.00 0.0038.720.0033
262.6201.041.610.00 0.001343.000.00189
• Currently 4/5
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%.

14560.0205.775.988.10 8.9020.421.55178
• Currently 1/5
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%.

373.88019.529.090.00 1.4011.400.0050
• Currently 1/5
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%.

1132.7501.9722.750.00 0.0086.760.00131
12295.9602.1793.650.00 0.0088.070.00107
• Currently 1/5
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%.

4787.2406.786.77-4.40 -40.1029.674.87152
102.8706.1124.100.00 0.0019.540.00198
• Currently 1/5
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%.

262.0305.16286.780.00 3.1039.140.0045
• Currently 1/5
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%.

11443.0605.3013.84-6.10 -8.8025.952.77186
• Currently 3.5/5
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%.

5193.09040.8281.057.40 14.8016.474.241
• Currently 1/5
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%.

219.7505.315.190.00 0.0018.040.40175
14.4107.8214.280.00 0.0013.840.00114
3.1200.986833.330.00 0.00N/A0.0094
• Currently 1/5
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%.

274.6108.4745.190.00 18.5018.863.3638
• Currently 3/5
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%.

5801.8703.1565.2019.40 15.90184.880.00136
• Currently 1/5
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%.

22861.2302.9421.954.00 0.0035.390.85146
8848.2602.637.970.00 0.0096.660.00176
• Currently 1/5
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%.

10.32027.938.110.00 0.00N/A0.0060
• Currently 1/5
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%.

637.8401.6920.580.00 -43.90253.320.00196
• Currently 1/5
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%.

7796.82012.5825.450.70 -9.2010.901.8637
7656.0605.3069.780.00 0.0021.050.0030
4506.4201.3732.480.00 17.10108.850.00145

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