If you want to increase your chances to beat 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 construed 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 ratios, Magic Formula stocks are further narrowed down to be U.S. stocks with a market capitalization exceeding $100 million, as businesses that do not possess these criteria have different capital structures.
Below are three of my stock picks that rank highly on the GuruFocus Magic Formula screener, a screener based on the Magic Formula criteria.
Turtle Beach Corp
The first stock that investors may want to consider is Turtle Beach Corp (HEAR, Financial), a San Diego, California-based developer of gaming headset solutions for video games, various entertainment consoles, personal computers and several other devices.
The stock price traded at $25.23 per share at close on Jan. 22 for a market capitalization of $383.18 million, an earnings yield of 15.77% and a return on capital of 252.24%.
Turtle Beach's earnings yield ranks higher than 88% of 2,346 companies operating in the hardware industry, while its return on capital ratio ranks higher than 97% of competitors.
The share price has risen by nearly 217% over the past year to trade about 65.2% above the middle point of the 52-week range of $4.05 to $26.48.
Currently, Turtle Beach does not pay dividends.
GuruFocus has assigned a score of 8 out of 10 for the financial strength rating and of 3 out of 10 for the profitability rating of the company.
On Wall Street, the stock has a median recommendation rating of buy and an average target price of $27.75 per share.
Buckle Inc
The second stock that investors may want to consider is Buckle Inc (BKE, Financial), a Kearney, Nebraska-based casual apparel retailer.
The stock price closed at $33.80 per share on Jan. 22 for a market capitalization of $1.67 billion, an earnings yield of 12.48% and a return on capital of 49.96%.
Buckle Inc's earnings yield ranks higher than 80% of 1,052 companies operating in the retail - cyclical industry, while the return on capital ratio ranks better than 83% of competitors.
The share price has risen by 35.04% over the past year to trade about 46% above the middle point of the 52-week range of $11.76 to $34.54.
Currently, Buckle Inc is paying quarterly cash dividends to its shareholders, with the last payment of 30 cents per share issued on Dec. 29, 2020, producing a forward dividend yield of 3.55% as of Jan. 22.
GuruFocus has assigned a score of 5 out of 10 for the financial strength rating and of 7 out of 10 for the profitability rating of the company.
On Wall Street, the stock has a median recommendation rating of hold and an average target price of $14 per share.
WW International Inc
The third stock is WW International Inc (WW, Financial), a New York-based provider of nutritional, consumer and lifestyle products and services, as well as various digital subscription products to wellness and weight management business.
The stock price was trading at $24.35 per share at close on Jan. 22 for a market capitalization of $1.66 billion, an earnings yield of 8.54% and a return on capital ratio of 190.11%.
WW International Inc's earnings yield ranks higher than 82% of 100 companies operating in the personal services industry, while the return on capital ratio ranks better than 90% of competitors.
The share price has fallen by 27.55% over the past year to trade slightly below the middle point of the 52-week range of $9.75 to $39.75.
Currently, WW International Inc does not pay dividends. It stopped with the distribution in 2013.
GuruFocus has assigned a score of 4 out of 10 for the financial strength rating and of 7 out of 10 for the profitability rating of the company.
On Wall Street, the stock has a median recommendation rating of overweight and an average target price of $31.04 per share.
Disclosure: I have no position in any security mentioned in this article.
Read more here:
- A Trio of Stocks Trading Below Intrinsic Value
- 3 Stock Picks for a 'Buy and Hold' Approach
- 3 Capital-Intensive Stocks for the Value Investor
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